As you might have seen here earlier this week, the team at Bell Potter believe the Commonwealth Bank of Australia (ASX: CBA) share price is in the buy zone.
Its analysts currently have a buy rating on CBA and a $108 price target on the banking giant's shares.
This implies a potential upside of 14% for investors over the next 12 months.
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How does Bell Potter value the CBA share price?
Let's dig a little deeper and see why Bell Potter thinks the CBA share price is worth $108.
According to their note, the broker's price target is based on a composite valuation of discounted cash flow, dividend yield, return on equity (ROE), and sum-of-the-parts (SOTP) weighted equally.
In respect to its SOTP valuation, the broker values the bank's segments as follows:
- Retail banking at 18x FY23 earnings = $83.45bn or $48.90 per share
- B&PB / IB&M at 18.5x FY23 earnings = $79.24bn or $46.44 per share
- New Zealand at 17.5x FY23 earnings = $25.02bn or $14.66 per share
- Total SOTP = $187.7bn or $110.00 per share.
On a discounted cash flow basis, the broker values CBA at a price of $87.17 per share.
On a sustainable dividend yield basis, it values the bank at $108.53 per share. On a ROE basis, it values CBA at $114.27 per share.
As mentioned above, Bell Potter weighs each of these valuation methods equally. This means it divides each of them by four and then adds them together. This results in $27.50, $21.79, $27.13, and then $28.57 per share, which comes to a final price of $104.99 per share for CBA.
But there's one final thing we need to add in before the valuation is complete. That is the bank's surplus capital, which at the time of the note was estimated to be $5,534 million or $3.24 per share.
If we add this on and round up, this brings CBA's valuation to $108.24 per share. Given that this is meaningfully higher than the current CBA share price of $94.70, Bell Potter believes this justifies a buy rating.
