Arbuthnot Banking (ARBB) presents something of a valuation anomaly. Its market capitalisation is worth significantly less than the £276m market value of its 52 per cent stake in its listed subsidiary, challenger bank Secure Trust (STB). While there are explanations for the discount, we think the blossoming of Arbuthnot's private banking business will soon make the valuation gap very hard to justify.
- Discount to Secure Trust stake
- Debt demand growing
- Private bank expanding
- Profits surcharge
- Illiquid shares
Let's address the initial puzzle of the discount. Analysts at Edison model a 10 per cent discount to the market price of Secure Trust to reflect the illiquidity of such a large stake. That still puts a value of £248m on the stake, which is above Arbuthnot's own market capitalisation. And it's worth noting that the 10 per cent haircut is well above the 3.8 per cent discount to market price that Arbuthnot accepted when selling its last major chunk of shares in June 2014, which reduced its holding from 67 per cent to 53 per cent. This may be academic for the time being as Arbuthnot is not thought to be in any rush to give up having a controlling stake.