Now we're going to do a trading comparables for direct line. We've got some market data here. We've got the current share price of three pounds, 14 pence. And let's just compare that to the value we came up with with the dividend or the discounted dividend model. And that was giving us an implied share price of three pounds 75. So just on a fundamental basis or an intrinsic basis, we think that direct line is undervalued in the market. Now what we've done here is we've pulled in the numbers of shares and we can calculate the market value. We've got the current book value which gives us a priced book value of one and a half times and the current return on equity of 13.7%. And that's based on the fiscal year 2, in other words, two fiscal years into the future divided by the current book value. We've also got some comparables from the same geographical area and the same industry insurance, property and casualty insurance. And we've calculated, we've got both their return on equity here and we've got the price to book values here. We've put these just a little bit more usefully in a little metric, here. We've got the return on equity and the price to book value. And what I'm gonna do first is I'm going to just graph these. So I'm gonna go ahead and insert a scatter chart. And the one I want, there's actually two types of scatter charts. You want the one that takes a dependent variable on the y axis and a dominant variable on the x axis. So I'm gonna take that one there. And when I do that, it's given me a few bits of information but I want to put some axes on here just to make this super clear. So the first thing I'm going to do is put in a horizontal title, and this is our return on equity. That's our ROE. And then I'm also gonna put in another axis and this is going to be my vertical axis, which is the dependent variable. And this is going to be the price to book value multiple. So I'm just gonna select that P price to book value. Now the title is currently price to book value but really this is a relative valuation graph.

Now, once you've done that, we've got most of the data there but actually it's not very useful to us because what we want to do is we want to actually be able to see what the linear equation is for this relationship between price to book value and return on equity. So what I'm gonna do is I'm just going to go to the chart and I'm gonna add a trend line, but there's some more options I want to put in as well as just a trend line. So I'm gonna do a linear trend line, but I'm also going to do the linear equations. That's the slope of the line and the R squared. The R squared is useful 'cause it gives us the strength of the relationship. And you can see it's a pretty strong relationship. Part of that is because we've got this outlier, but generally a one or 100% R squared represents a perfect relationship. And generally in financial institutions, we'll see a relationship between return equity and price book value being around about 0.8. In other words, a strong relationship. And the driver of course, is the return on equity, the price to book value is the result. So what we're going to do is we're going to just use this linear equation here, which says the price to book value is equal to 0.2096 times the return on equity minus 0.7615.

And what we're going to do is we will calculate the implied relative value of the price book value by firstly taking the return on equity for direct line the 13.7, and then I'm gonna use the linear equation. So I'm going to multiply that by 0.2096 and then I'm gonna subtract from that the 0.7615 that will give us the implied price to book value multiple based on that or the slope of the line and the return on equity that direct line is currently generating. Now we do have the book value up here so I can take that book value and I can multiply it by the multiple of 2.11 and that will give us the implied market value. I can then take the implied market value and I can divide that by the number of shares outstanding to get an implied share price which is significantly higher than the current market price. So if we do a comparison here, the fundamental valuation which is the discounted dividend model, is three pounds 75. The relative valuation which we've just done is four pounds 45 but the actual share price that direct line is currently trading on is three pounds 14. So this says that both on a fundamental basis and relative basis, direct client is undervalued.