AGF Management Limited (TSE:AGF.B) Investors Are Paying Above The Intrinsic Value

Pricing capital market stocks such as AGF.B is particularly challenging. Given that these companies adhere to a different set of rules relative to other companies, their cash flows should also be valued differently. For instance, these businesses must hold a certain level of cash reserves on the books as a safety precaution. Focusing on line items like book values, as well as the return and cost of equity, may be practical for evaluating AGF.B’s true value. Below I will take you through how to value AGF.B in a fairly useful and uncomplicated way. View our latest analysis for AGF Management

What Is The Excess Return Model?

Let’s keep in mind two things – regulation and type of assets. Canada’s financial regulatory environment is relatively strict. Furthermore, capital markets tend to not possess large amounts of tangible assets as part of total assets. So the Excess Returns model is suitable for determining the intrinsic value of AGF.B rather than the traditional discounted cash flow model, which places emphasis on factors such as depreciation and capex.

TSX:AGF.B Intrinsic Value Mar 20th 18
TSX:AGF.B Intrinsic Value Mar 20th 18

Deriving AGF.B’s Intrinsic Value

The key belief for Excess Returns is that equity value is how much the firm can earn, over and above its cost of equity, given the level of equity it has in the company at the moment. The returns above the cost of equity is known as excess returns:

Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)

= (5.26% – 8.43%) * CA$11.85 = CA$-0.38

We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:

Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)

= CA$-0.38 / (8.43% – 2.13%) = CA$-5.96

Combining these components gives us AGF.B’s intrinsic value per share:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= CA$11.85 + CA$-5.96 = CA$5.89

Relative to today’s price of CA$6.7, AGF.B is priced in-line with its intrinsic value. This means AGF.B isn’t an attractive buy right now. Pricing is only one aspect when you’re looking at whether to buy or sell AGF.B. Fundamental factors are key to determining if AGF.B fits with the rest of your portfolio holdings.

Next Steps:

For capital markets, there are three key aspects you should look at:

  1. Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.
  2. Future earnings: What does the market think of AGF.B going forward? Our analyst growth expectation chart helps visualize AGF.B’s growth potential over the upcoming years.
  3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether AGF.B is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on AGF.B here.