Shares in specialist lender Close Brothers Group PLC (LSE:CBG) are extremely cheap at the moment, but analysts warn that investors hoping for a quick dose of alpha could be waiting a while.
On a tangible book value (TBV) to price basis (which is a key valuation ratio in finance), Close Bros shares are trading in the ballpark of just 0.2% times, per KBW analysis.
This compares to a UK bank average of closer to 0.7 times, as is the case with Lloyds Banking Group PLC (LSE:LLOY).
Close Bros’ cheapness is due to a collapse in its year-to-date share price following a potentially crushing ruling over motor finance commissions.
The UK Court of Appeal (FCA) ruled that Close Bros, Lloyds and other banks are liable for potentially billions of pounds in compensation claims tied to motor financial misselling, echoing the PPI scandal of the 2010s.
Close Bros is attempting to appeal the ruling before the Supreme Court, but the success of the appeal is anyone’s guess.
Although other banks are involved, Close Bros has a particularly high level of exposure to the issue.
“A market capitalisation of £300 million against tangible book value of £1.4 billion suggests that a very conservative motor finance scenario is priced into the shares,” said KBW analysts.
“However, with resolution unlikely to take less than 12-18 months at best and redress risk potentially extending to Premium finance as well, upside from the discounted valuation will clearly take time,” they added.
Peel Hunt analysts concurred, stating: “The share price is unlikely to be much moved… in our view, being driven more by whether the Supreme Court agrees to accept Close's appeal against the Court of Appeal ruling; whether the Supreme Court then finds in favour of Close; and the outcome of the FCA investigation into the historic use of discretionary commissions in Motor Finance.”
In short, there is a considerable amount of risk hanging over Close Bros’ shares, but if the scales of justice tip in their favour, there could be considerable rewards too.