Friday, October 23, 2009

Citigroup (NYSE:C): Burndown & SOTP uncover more value - Merrill Lynch/BAM

Merrill Lynch/BAM is out positive on Citigroup (NYSE:C) raising their valuation ranges on the stock. They now see $8 to $12 valuation as mid-best case SOTP.

Firm notes their decision to upgrade Citi to Buy in August was based on a detailed Burndown analysis that showed, in their view, the stock had little downside and significant upside potential as it was trading around “Burndown” Book Value. In their original Burndown analysis, they sought to determine the value of Citi’s shares after putting the balance sheet through a very punitive stress test. In this initial Burndown scenario, the firm assumed Citi absorbed $141bn in losses, $38bn of which came from the Special Asset Pool. Citi recently released improved disclosure on the Special Asset Pool, and Merrill has reassessed their loss estimate in light of the new information, in addition to updating their analysis for 3Q:09, during which gains were recorded in the SAP. The new disclosure clarified exposure to specific asset classes within the SAP, and indicates that their original total loss estimate of $141bn for Citi was perhaps $21.4bn too high. They have lowered expected losses on the SAP to $23.4bn from $37.8bn in the Worst case scenario.

Burndown scenario puts downside at $4.22
Merrill has revisited their original Burndown analysis on review of improved disclosure on the Special Asset Pool. They deem their original “Worst-Case” loss scenario somewhat too severe. Their new Worst-Case downside valuation is $4.22 (was $3.44) on a Burndown Book Value per Share of $4.14 (was $3.88).

Sum-of-the-Parts values C at $8.73
Merrill's Sum-of-the-Parts analysis yields a $199bn valuation, or $8.73 per share on 22.9bn shares. As a “reality check”, they test their SOTP by applying its assumed losses to a “Burndown”, and arrive at an $8.12 valuation, providing support.

“Excess capital” scenario puts upside at $11.67
Firm's Best Case scenario examines possible eventual share repurchase ability due to excess capital in a “normalized scenario”. Best case scenario yields a value of $11.67 on a 15.9bn share count.

Long-term value compelling, maintain PO for now
They think the long-term value thesis for Citi is compelling but are leaving their PO of $5.75 in place, as it represents a small discount to current BVPS and they continue to expect Breakeven earnings at best well into 2010. PO’s are established on a 12-month basis. Merrill's PO still provides 30% upside potential.

Reits Buy.

Notablecalls: So now Merrill is starting to call a double in Citi in the next 12-18 months? Kind of looks like it.

Should create some buying interest in the name.

Interesting to see if this one can trade over the $4.60 level today.

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