DANSKE, a valuation attempt.

Before reading this article, have a look at my Disclaimer

First of all — the whole premise of value investing rests on the notion that price and value are two different things. As Buffet said: price is what you pay, value is what you get. According to modern portfolio theory, price and value are always equal. So if you are a follower of MPT, you can stop reading here.

DANSKE is the largest bank in Denmark. It also has operations in other Nordic countries. Since value investing with a large margin of safety requires some kind of issue or incident to get people to sell their assets below intrinsic value, I though I’d run this company through Mungers four requirements.

1) Are you capable of understanding the business? Yes, it’s a bank 🙂 Would you be comfortable holding it for 10 years? Absolutely.

2) Does the company have a durable competitive advantage? I would argue yes. It is the largest bank in Denmark, and the brand still has value. People also tend to avoid changing banks, with all the hassle of new credit cards, new salary accounts, and so forth. So it has a switching moat, and a brand moat. You could however argue the brand moat has somewhat deteriorated. 50.000 customers left this year, and around 43.000 last year, according to «Voxmeter» a customer and image surveying company. Danske confirms customers leaving, but disputes these large numbers.

3) Does the management have integrity and talent? Maybe now, after replacing the CEO and other management. But probably not when the scandals first hit.

4) The price must make sense. Let’s take a closer look at the current pricing.

• Price / Tangible book value pr share is currently 0,55. During the last 10 years the median is 1.08, minimum 0.42 and maximum 2.09 So if the company pays all debt, and sells all its assets for the price at book value (which should be correct) and distribute the remaining cash to the shareholders, you would make 45% on the current market price. In theory. But this never happens with public companies. People tend to want to keep their jobs as long as possible. In comparison the largest Norwegian bank, DnB has 1.29
• Now let’s look at the cash flow. By using cash flow instead of earnings, we will avoid getting fooled by the inherent flaws of how earnings are calculated. The price/cash flow ratio (p/cf) is currently 1.61 according to Morningstar.
• Also, Morningstar has calculated a PEG ratio currently at 0.23
• Operating margin for the trailing twelve months(ttm) is 29.03
• Looking at the analyst forecast of earnings and dividends, the median dividend for 2021 is estimated at 7 DKK, and the average is 6.4 DKK For 2022 the same numbers are 7.6 DKK for both. Median and average earnings for 2021 is forecasted to 14.0 and 12.8 DKK. For 2022 14.8 and 14.2 DKK. All estimates are based on 16 different analysts views.
• Book value pr. share has steadily increased the last couple of years.
• Danske has recorded a quite substantial impairment charge in 2020, which in turn has lead to a low roe. (4.34 billion DKK + an additional 57 million later the same year. This was up from around 600 million DKK in 2019)

The average P/B ratio in for banks in Denmark is 0.8 If we assume Danske reaches the ratio of 1, a little less than the 10 year average, the value would equal 193 DKK. If we use the national average we get 193 x 0.8 = 154,40 Danske being the largest bank, should qualify for a premium.

From this I would argue that the current pricing is around a 10 year low. Considering the current price, and state of the company, I believe this is what Monish Pabrai would call a free lottery ticket. If I’m right I win, if I’m wrong I do not loose much. My assumption rests on no new money laundering scandals showing up, and Danske being able to keep most of their customers going forward.