- Buy DBK below €15 for value based on:
- Arbitrage boundary of 25% of tangible book value assuming no cash flows and potential litigation (€6.75 per share) +
- Intrinsic value of 10Y cash flows assuming zero growth (€5.20 per share) +
- Absence of litigation discount (€3 per share)
DBK has returned to profitability which means that many professional analysts are likely to be using some sort of cash flow valuation method. We don’t have any alpha competing in this game on a granular level, however it could pay to be ready for some crazy price action as this stock has traded in a 20% range over the past 6 months.
First let’s look at the intrinsic value of DBK’s future cash flows (assume these numbers are in EUROs).
Using 90% of the annualised MRQ revenue and the current net profit margin we calculate an intrinsic value of cash flows €5.18.
The other half of the story is the book value. There must exist some price that the majority of Wall Street will pay per €1 of tangible book value. The theory being that if DBK trades excessively cheap then the company gets a better return from a buyback than holding underperforming assets. So what’s the arbitrage boundary?
In September 2016 DBK traded as low as 25% of tangible book value (€9) during a period of time when the bank was unprofitable and in potential litigation crisis. This is our best indicator as to the arbitrage boundary.
Current tangible book value is €27 per share which puts the book value boundary at €6.75. The bank is now profitable so we add on the intrinsic value of cash flows to get approx €12. The last piece of the puzzle is the value of the discount due to the litigation crisis, which in our opinion is best deciphered using technical analysis.
From the above chart we depict the litigation crisis discount to be worth €3, which makes DBK a buy at €15 for value.