The Swiss banking giant reckons current valuations of around seven times this year’s forecast earnings (7x 17/18 earnings) are low compared with its peers.
Virgin also has the potential to be one of the first movers in becoming a ‘front-to-back’ digital organisation which, if successfully implemented, “arguably leaves the prospective investor with a differentiated asset”.
Previous merger and acquisition activity in the sector has seen offer prices of around 10x 12-month forward consensus earnings according to analyst David Da Wei Wong, which would imply around a 50% upside to the current share price.
At this moment in time though, Wong admits this is just a “purely theoretical scenario” and has actually downgraded Virgin Money to ‘neutral’ from ‘outperform’, while he has also chopped his price target to 305p (from 330p).
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In Thursday morning’s note he he’s “cautious about the margin outlook” given potential constraints on deposit and mortgage pricing.
As a result of weaker margins, growth and £35mln of costs associated with the digital bank, the analyst has lowered his earnings forecasts to 37.42p per share this year (down from 38.11p) and 38.75p next year (from 41.29p).
Shares edged 0.5% higher to 267.2p midway through the morning session on Thursday.