Wednesday 22 May 2019

Inflated stock price means buyer beware

Analysis

Pedestrians pass a branch of the Allied Irish Bank (AIB) in Dublin, Ireland
Pedestrians pass a branch of the Allied Irish Bank (AIB) in Dublin, Ireland
Donal O'Donovan

Donal O'Donovan

Buying over-valued AIB shares has been referred to as the eejit trade, because the market price is so divorced from reality.

Finance Minister Michael Noonan is not the first to flag up the fact that the shares are worth far less than their price suggests.

His comments should not be seen as any kind of reflection on AIB managers, who have no control over the price people pay for their shares.

The bank itself issues regular warnings to investors highlighting how out of sync its shares are with those of other banks.

The simple way to work out the value of a stock-market-listed bank or company is to multiply the price of a single share by the number of shares.

There is nothing scientific about it, the valuation simply reflects what investors are willing to pay.

Shares in AIB were trading at 10.40 cent each yesterday. In theory, that values the bank at €54bn, about 25pc more than Deutsche Bank.

But AIB's valuation has become muddled because the bank issued more and more shares every time it needed government support over the past six years.

Most of those shares - in excess of 99pc - are held by the Government and never change hands on the stock market. But they are real shares.

Another reason for the anomaly is that some investors regard AIB as good value compared to Bank of Ireland.

Bank of Ireland shares were trading at 28.8 cent each yesterday. That might look like slightly less than three times the AIB share price, but in fact Bank of Ireland has far fewer shares.

So, the entire bank is valued at €9.3bn, six times less than AIB.

Any one can pay any price they like for a share - it's up to the buyer to beware. That may be one reason Michael Noonan was so direct in his language yesterday.

He plans to bring forward plans by the end of the year to start selling more of AIB back to the market.

That's likely to involve a reduction in the number of the shares, a technical move that might help make pricing more transparent - although it's pretty transparent as things stand.

There will also be a sale of a significant number of shares to big investors, enough to swamp the current tiny volume of trading and bring prices crashing down.

Investors who have insisted on buying stock at elevated valuations will suffer big losses when that happens.

Irish Independent

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