It’s been a pretty crazy past month for Metro Bank (LSE: MTRO) shares. Over this period, the share price has halved following desperate efforts to shore-up the balance sheet. Yet with a last minute deal being struck to raise capital, the short-term problem seems to have been dealt with. So does this make the stock a good purchase?
Long story short
The gist of the problem for Metro Bank is that it hasn’t been able to get approval from the regulators to adopt a new way of valuing mortgages. If it had been accepted, Metro’s internal system would have meant lower capital requirements for the bank, easing the pressure that it currently has on its finances.
This alone might not seem like a big deal. Yet the fact that it consequently needed to race to find alternative ways to raise capital was a red flag for investors. The obvious way would be to issue more equity, but given how sharply the share price has been falling, it’s not that easy.
Last week management turned to looking at a sale of some of the mortgage book to a competitor. This process is still ongoing, but no quick buyer has been found.
During all of this, the share price continued to fall. But thanks to talks over the weekend, it has been announced that a £925m financing deal has been struck via a mix of equity and debt issuance, helping to boost the outlook.
Looking at the stock
The share price rallied 11% yesterday (9 October) and is up another 4% today. Even with this, the market cap is currently only £90m. This is a far cry from the £3.5bn of five years ago. It also seems low when we consider the £925m value of the finance package.
Clearly, investors aren’t pinning much value on the company as it stands. The business is loss-making, so I can’t use the price-to-earnings (P/E) ratio to get a feel for the relative value. But I can look at the forward P/E ratio, which uses the estimated future earnings per share.
At the moment, the forward P/E ratio is 2.67. This is very low, far below my benchmark figure of 10 that represents fair value. So this could indicate that the stock is undervalued.
Another point I’d flag is the market cap relative to its peers. Last year, Metro reported revenue of £523m and has a market cap of £90m. Close Brothers had revenue of £932m and has a market cap of £1.31bn. Bank of Georgia had revenue of £724m and has a market cap of £1.6bn. Just on this comparison alone, Metro Bank looks undervalued.
A high-risk bargain
I don’t think the problems for Metro Bank are completely solved by any means. The potential sale of some assets could take months to organise and finish.
Yet based on how low the stock price is, I just can’t see it staying at current levels for a long period of time. It’s definitely a high-risk play. But for investors who are comfortable and understand the risks involved, it could yield high rewards and be worth some further research.
