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The CYBG share price is down 17% YTD: is it a buy?

The CYBG Plc (ASX: CYB) share price is down 17.7% so far this year. Here’s why I think it’s time to buy.

Background on CYBG 

CYBG is a bank with operations in the United Kingdom (UK). Its brands include Clydesdale Bank, Yorkshire Bank and B. It serves almost 3 million customers across online, mobile and telephone banking along with in person banking at branches. It has 169 branches and 40 business banking centres. The group has a market capitalisation of $2.57 billion.

Why I think it’s a buy

CYBG has a price-to-earnings (P/E) ratio of 4.18x against the ASX 200, which has a P/E ratio of 17.81x at the time of writing. So far in 2019, earnings look set to be slightly lower than the prior year, however, they are solid and the group looks set to make an underlying return of more than 10% on tangible equity.

The group has a price-to-book ratio of just 0.43, while ASX 200 has a price to book ratio of 2.16. This suggests that the stock is trading at a very low price against its accounting value. The group made a return on equity of 9.9% in 2018 and 6.5% in 2017, which means that if the group maintains profitability, returns could be very high for someone buying at this point in time.

CYBG has not paid dividends since it listed on the ASX a few years ago. This could be a warning sign for some investors. However, it does not necessarily mean that the business is in bad financial shape, more that its management are keen to reinvest earnings. Additionally, the fact that no dividend is paid at this time also means that the company should attract a significant rerating when it decides to start paying dividends in the future.

Another significant positive upside for this business is its pending rebranding to Virgin Money. Following this rebranding and renaming of the group, it will have the added benefit of attracting customers though the widely known Virgin brand along with retaining existing customers. Its plan to disrupt the status quo in UK banking appears likely to succeed and this should boost revenue significantly. This will take place later this year.

The group is mostly funded by customer deposits but does have some debt. However, this seems manageable and the group appears to have prepared for any disruptive Brexit scenario.

Foolish takeaway 

CYBG trades on a low P/E ratio and a low price-to-book ratio. It has manageable debt and is undertaking a large rebranding strategy that is likely to boost revenue. I think it’s a buy.

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Motley Fool contributor Chris Chitty has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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