Since Metro Bank’s (LSE:MTRO) IPO in 2016, the shares have accumulated a total loss of 99%. However, such a terrible start doesn’t always spell a lack of opportunity. Instead, when shares drop at such considerable rates, what was once overinflated can now be deemed as potentially undervalued. I think Metro Bank shares are undervalued on some fronts, but let’s see if the financials could support a long-term investment decision.
What’s going on?
Metro Bank is a retail bank that operates in the United Kingdom. Founded in 2010, the aim — in competition with conventional banks — was a customer-focused banking experience.
Metro Bank did enjoy rapid growth. However, the 2016 IPO saw overexcitement in the valuation of the newly listed shares.
In recent years, the company has faced a litany of complications. These include accounting errors and regulatory hurdles, which have negatively impacted the share price.
Metro Bank is now seeking fundraising, aiming to improve its balance sheet and improve its financial prospects. It is this crucial point that is causing the negative sentiment of the shares.
A look at the financials
The company has quite strong cash-to-debt. It ranks better than 72% of companies in the banking industry on this measure. Its equity-to-asset situation isn’t as favourable. It is currently 0.05 and worse than 89% of competitors. Debt-to-equity is somewhat average, worse than 55% of competitors and currently 0.84.
There are some positives on the price-to-tangible-book value, which is a good indicator of a value opportunity here. Investors are currently paying 1/10 of the tangible book value of shares. That’s an amazing opportunity at first glance.
What I don’t like are the current net margins. They are currently 0.3%, which is awfully low. There have also only been two years of profitability over the last 10.
Is it the right price?
I do see the shares as notably undervalued at the current price. They are down 48% over the last month.
However, I’m proceeding with extreme caution. The price is low, but the business is relatively weak on all fronts. I’m a value investor, but I dedicate myself solely to companies with exceptional financials and growth prospects. Valuation always comes second in my portfolio.
What does the future look like?
The future for Metro Bank is uncertain. There are significant challenges to overcome. These include a complex regulatory environment and significant financial restructuring.
If up to the reported £325m is raised and £600m of debt refinancing performed, there is significant hope. Majority control will be in the hands of Colombian billionaire Jaime Gilinski Bacal. A turnaround in the medium- to long term is possible.
However, I’m not convinced this investment is a prudent move. There are too many risks.
Although the annual loss is narrowing, the company is widely expected to break even through 2023-24. That’s good news, but I can’t see a compelling hypothesis as to why the stock will perform better than the FTSE 100 over 10 years.
I have a few highly undervalued companies in my portfolio with exceptional fundamentals. Metro Bank simply doesn’t size up next to them.
