As you might have seen here earlier this week, the team at Bell Potter believe the Commonwealth Bank of Australia (ASX: CBA) share price is in the buy zone.
Its analysts currently have a buy rating and $108.00 price target on the banking giant’s shares.
This implies potential upside of 14% for investors over the next 12 months.
How does Bell Potter value the CBA share price?
On this occasion, let’s dig a little deeper and see why Bell Potter thinks the CBA share price is worth $108.00.
According to the note, the broker’s price target is based on a composite valuation of discounted cash flow, dividend yield, return on equity (ROE), and sum-of-the-parts (SOTP) weighted equally.
In respect to its SOTP valuation, the broker values the banks segments as follows:
- Retail Banking at 18x FY23 earnings = $83.45bn or $48.90 per share
- B&PB / IB&M at 18.5x FY23 earnings = $79.24bn or $46.44 per share
- New Zealand at 17.5x FY23 earnings = $25.02bn or $14.66 per share
- Total SOTP = $187.7bn or $110.00 per share
On a discounted cash flow basis, the broker values CBA at $87.17 per share.
Whereas on a sustainable dividend yield basis it values the bank at $108.53 per share and on a ROE basis it values the company at $114.27 per share.
As mentioned above, Bell Potter weights each of these valuation methods equally. This means it divides each of them by four and then adds them together. This results in $27.50, $21.79, $27.13, and then $28.57 per share, which comes to $104.99 per share.
But there’s one final thing we need to add in before the valuation is complete. That is the bank’s surplus capital, which at the time of the note was estimated to be $5,534 million or $3.24 per share.
If we add this on and round up, this brings CBA’s valuation to $108.24 per share. And given how this is meaningfully higher than the current CBA share price of $94.70, Bell Potter understandably believes this justifies its buy rating.
The post Here’s how this top broker values the CBA (ASX:CBA) share price appeared first on The Motley Fool Australia.
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More reading
- 5 things to watch on the ASX 200 on Wednesday
- CBA (ASX:CBA) doubles down on ‘core business’ with $1.8 billion sale
- Which ASX 200 shares have delivered the biggest dividend payout increases this earnings season?
- Top broker says CBA (ASX:CBA) is ‘on its way back’
- Analysts name 2 ASX dividend giants to buy
Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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