Sunday, October 12, 2008

OCBC's valuation range

I learnt a little more about the person who wanted a stake in Ocbc. She wanted to pass it on to her future generations, so the time horizon can be stretched further than the 3-5 yrs that she had told me initially. As such, preference shares might not be the best option anymore. I'm looking more into OCBC because that's what she wanted.

This is based on the data I posted on my earlier post.

Based on historical data, the dividends per share (excluding extraordinary and special dividends) had been increasing steadily for the past 5 years. Since I still do not know how to valuate banks well, I might as well treat OCBC as a dividend yielding company. I'm not looking for extraordinary growth here, just hope to see enough income to beat inflation (~3-5% pa returns in the form of dividends) is good enough.

Assuming that we have a pretty bad year in 2008, and OCBC has a EPS of 50 cts (do note that 1H08, OCBC's diluted EPS is already 53.3 cts). Assuming a dividend payout ratio of 35% (management mentioned payout of at least 45% of core net profit though), we can expect the DPS to be 18 cts. In order to have a dividend yield of 3% to 5%, we ought to buy OCBC at a price range of $3.6 to $6, with the lower price limit corresponding to a dividend yield of 5%. At this starting dividend, even if the EPS (and the corresponding dividend per share) do not increase, it's still very good.

If we look at the price to NAV (without valuation surplus), it ranges between a low P/NAV of 1.15 to 1.57. Based on 1H08, the NAV (without valuation surplus) is $4.60, so multiplying by these multiples, we get a price range of between $5.29 to 7.22.

Lastly, on a technical perspective, here's the chart for OCBC since 2003.

Support levels can be found at 5.70 (Jul 2005 low). This seems to me to be a pretty strong level. The next lower level will be at $5, back to early 2003 level.


1. $3.6 - $6 for a dividend yield of 3% to 5% (look at the assumptions made)
2. $5.3 - $7.2, based on P/NAV (without valuation surplus)
3. $5.70, if not $5, based on 5 yr chart