Coop Pank AS (CPA1T ET): Banking on domestic synergies

* Coop Pank AS (hereafter referred to as ‘Coop Pank, ‘Coop’ or the ‘group’) is a local Estonian bank, formerly Eesti Krediidipank AS, which was fully reorganised and rebranded after Coop Estonia and its member cooperatives became new strategic owners of the group in 2017. In November 2019, an IPO of Coop took place and the group attracted over EUR 30m of new equity capital, followed by the listing of its shares on Nasdaq Baltic Main List. After the IPO, Coop Estonia and its member cooperatives remain strategic partners, with their combined ownership at c.a. 44%. Coop performs all traditional universal banking operations and positions itself as one among the five universal banks in Estonia, presently controlling above 2% of the market. The group’s subsidiaries are engaged in the areas of leasing, consumer finance, and real estate management. Essentially, Coop has the most extensive network of outlets in the country, comprising 15 bank branches, 28 banking points within Coop stores as well as all c.a. 330 Coop stores as access points to its services.

* We have approached the valuation of Coop using a combination of the income and market approaches. For the income approach, we used two different models: 1) the Residual Income Model, and 2) the modified Gordon Growth Model (‘GGM’), which essentially identifies the fair P/B ratio valuation for the company. For the market approach, we used a peer group valuation, which considers several peer group trading multiples for 2019-2021E and applies the peer group average valuation multiples to the respective financials for Coop. Applying a widely-used comparative valuation approach for banking stocks, in terms of the peer group, we pay close attention to a tight correlation between ROE and P/B values for the selected peers. We considered the management’s strategic goals and financial guidance figures as ambitious but achievable, and used them as a basis for our financial projections for the group. We believe the recent IPO attracted a sufficient amount of new capital to finance Coop’s growth ambitions at least for the next two years, while further capital requirements, if needed, could be financed by subordinated loans. In valuing Coop Pank, we have used the weighted average of values derived from the RIM, the GGM, and the peer group data (P/E and ROE&P/B correlation), applying different weights to each method. Given the attractive growth profile of Coop compared to any of its listed peers, we see the income approach as more suited for this bank and have given both the RIM and the GGM a 40% weight in the total value, leaving the peer valuation contribution at 20% in total. All in all, based on our current projections for Coop Pank and other assumptions, we decided to set our fair value range at EUR 1.40-1.50 per share. Using the mid-point of our fair value range and our forecasts for 2020, the company would be valued at the following 2020E multiples: P/E – 16.5x and P/B - 1.3x, with the respective 2021E ratios declining substantially to 10.3x and 1.2x. The major risk factors to our valuation include slower than projected growth in volumes and a significant deterioration of the economic environment in Estonia.

* This report contains a full set of financial forecasts and is useful for gaining an initial insight into the company. Please also refer to the tables and charts in the attachment.