Westpac’s First Quarter Results, and my Forecast for Financial Year 2022

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I am going to put myself all the way out there today and make a forecast for Westpac in September. As is always the case, my forecasts are my opinion only, and are not intended as a recommendation nor advice. Furthermore, please do not act on anything you read here without first consulting a registered tax agent, financial planner, or a solicitor.

Moreover, I’m going to keep things simple, everything is back-of-the-envelope style. That is to say, this site is not about active trading, nor is it about academic rigour. Above all, this is a site where I publish the things I usually do for myself. I am making this forecast because I’m curious to know what is a fair value/price for ASX: WBC.

Introduction

Westpac released a lot of information this morning as can be seen on their own website [1]. I won’t cover everything in this post, but if you’re interested in a summary, then I suggest reading their slide pack. At this point, I am most interested in the performance measures. Westpac measure their performance this quarter by comparison to the previous two quarters. Firstly, I will use them to extrapolate out the rest of the financial year. Second, once I have an idea of what their next year looks like, I use data from their existing report’s to calculate a price I think is fair. Once I have a fair price, I compare that to today’s price and see if I should expect a capital gain.

Data

Extrapolation

This is the easy part, because Westpac have done the hard work for us. For the purpose of this analysis, I’m using the “1Q22 reported net profit after tax” from Westpac’s Slide Pack to make a rough (incomplete) Financial Statement:

$1Q22FY22
Income5,447,000,00021,788,000,000
Expenses-2,701,000,000-10,804,000,000
Operating Profit2,746,000,00010,984,000,000
Finance Costs-118,000,000-472,000,000
Pre-Tax Profit2,628,000,00010,512,000,000
Tax-813,000,000-3,252,000,000
Profit1,815,000,0007,260,000,000
 
Equity79,352,000,000

In order to align things to the annual reports on their company page, I made the following changes:

  1. I Combined the Net Interest Income, together with the Non-Interest Income into a single income amount.
  2. The cost of goods sold aren’t published, so I skipped them, I don’t need Gross Profit for this.
  3. In this case I assume the reported Expenses are all Operating Costs.
  4. To make the equity figure, I simply added the calculated FY22 Profit above together with their equity as at 30 September 2021.
  5. The figures in the FY22 column are simply the figures in 1Q22 multiplied by four quarters to extrapolate a full year.

At this point, I now know three things:

  1. Where they’ve been, as can be seen from the reports on their company page;
  2. Where they are now, as can be seen from the reports in foot note 1; and
  3. Where they are going, as I have shown in the above table.

Above all else, I’m looking for a simple valuation of Westpac on 30 September 2022, the end of their Financial Year. Three measures I find most important are the Price to Revenue Ratio, the Price to Earnings Ratio, and the Price to Book Ratio.

(I intend to make a glossary to better explain everything eventually, again it’s early days for this site.)

Interpolation

Since we want to determine a price from the ratios, we need to work backwards. Therefore, to work out each ratio I need to assume that there is no change to the number of ordinary shares issued by financial year’s end. At this time Westpac has 3,668,591,808 ordinary shares in my data set.

Rather than dividing a Price by a Revenue to make a Ratio, I will multiply a Ratio by the Revenue to make a Price. Likewise for Earnings and Equity/Book values. Since we don’t have a Ratio for 30 September yet, we need to improvise. Consequently, I will make an average Ratio from the ten years of data in their company page.

Analysis

Price Based on SalesFY22
Revenue per Share5.94
Average Price to Revenue Ratio3.02
Theoretical Price17.95
Price Based on ProfitabilityFY22
Earnings per Share1.98
Average Price to Earnings Ratio14.95
Theoretical Price29.59
Price Based on Management EffectivenessFY22
Equity per Share21.63
Average Price to Book Ratio1.60
Theoretical Price34.64

I want to keep things as simple as possible, so all that’s left to do, is to take the average of the three theoretical prices above to create my forecast price.

“I forecast WBC to close at $27.39 on 30 September 2022.”

Discussion

Considering that WBC closed at $21.07 today, my forecast may seem high, but is it realistic?

A move from 21.07 to 27.39 is an increase of about 30%. Looking at their company page, their change in Share Price last year was 54.4%, so 30% is still in the realm of possibility. Last financial year they closed at $26.00, so in reality a move up to $27.39 is quite achievable.

When we look at the 1Q22 report and the CFO’s commentary, we see that Westpac’s management are optimistic about the year ahead. First, their capital adequacy and liquidity is well above regulatory standards so that’s one less thing to worry about for some time. In addition, they’ve improved their loan book’s credit quality as shown by a lower provision for bad debts. Further, they continue to simplify the organisation’s structure, reducing headcount by 1,100, selling the wholesale dealer portfolio, and this quarter announced their upcoming executive structure.

Price to Revenue

For instance, compare the information in the above paragraph to the ratios I use in my forecast. Michael Rowland, the company’s CFO, suggests that the simplification will bring Westpac’s “people closer to the customers they support.” As a result this will translate to an improvement in sales, and in turn revenue, which supports my using the Price to Revenue Ratio as a fair measure.

Price to Earnings

I also favour the Price to Earnings Ratio which measures how well the company performs in turning Revenue into Profit. If the simplification process continues as well as it has, then Westpac will continue to reduce its Operating Costs. The lower the costs, the higher the profit. The higher the profit, the greater the value.

Price to Book

Equally important, the Price to Book Ratio measures how well the management take care of the company’s assets. A bank is a highly regulated organisation, and under those circumstances they sometimes little room to manoeuvre. Given Westpac’s significantly strong balance sheet, and the improvement in lending write-offs, the Price to Book ratio provides a fair measure.

Conclusion

In due time, I’m pretty confident that my forecast will hold up. It’s a very simple analysis but that doesn’t mean it’s not powerful. As shown above, the updated earnings fit into the past, present, and future. We established a fair and realistic price coupled with interpolated and extrapolated data. And we’ve also been able to add some confidence with qualitative information. Summing up, I think Westpac is a good company to watch over the next seven months.

I will be sure to revisit this post on 30 September.


[1] https://www.westpac.com.au/about-westpac/media/media-releases/2022/3-february/

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