INVESTORS are relieved that HBOS walked away from Abbey National. Shares rose on Tuesday when HBOS told the market that the takeover numbers did not stack up. The price rose again yesterday to close at 753½p, taking the two-day gain to 5.4 per cent.
The fact that HBOS shares trade on a lowly p/e ratio of eight, compared with a multiple of 14 for Abbey, was part of the reason why the bid figures did not add up for HBOS. But while these numbers may have made Abbey look too expensive, they make HBOS shares look cheap.
HBOS’s closest rivals trade on similar ratings. Abbey’s rating is inflated by the takeover intentions of Santander Central Hispano, the Spanish bank, while HSBC and Standard Chartered fare better because international exposure is thought to give better growth potential. Even so, HBOS’s rating is at the bottom of the range for the sector.
The dividend yield statistics also suggest that HBOS shares are lowly rated. With the dead weight of Abbey on its back, that lowly rating might have persisted. But now the fog, and the considerable risk, of doing the Abbey deal are behind HBOS, it is possible that the shares will be upwardly re-rated.
Doubts about the 2001 deal, that saw Halifax merge with Bank of Scotland to create HBOS, put downward pressure on the shares. Investors have also been concerned that HBOS would fall victim to the intensely competitive trading environment in UK retail financial services. Many worried that HBOS was exacerbating the problem by actively pursuing a “pile it high, sell it cheap” strategy.
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But doubts about the wisdom of the 2001 deal should have receded by now. Moreover, the higher HBOS piles its product and the more cheaply its sells it, the harder it becomes for rivals to keep up. The barriers for new entrants are also high, and built higher by the rising cost of regulation. In future HBOS may find itself with greater room for manoeuvre on price while continuing to improve its operating cost ratios.
HBOS may consign itself to relatively modest rates of earnings and dividend growth. But the Abbey decision clearly indicates it is happy to eschew the chance to shoot out the lights in favour of giving investors a warm, long-term glow. Buy.
Premier Oil
RETIREMENT looms for Charles Jamieson, the long-serving chief executive of Premier Oil. As Mr Jamieson prepares for life in the slower lane, the company he has run for the past 20 years is accelerating. He reckons that his shareholders will not be best served if Premier, the UK’s third-biggest independent oil and gas company, used its virtually debt-free balance sheet to pursue an aggressive, acquisitive growth strategy in the manner of Tullow Oil, its London quoted rival. Premier produces 35,200 barrels of oil a day but Mr Jamieson argues that anything above 50,000 reduces the scale of the share price successes that shareholders can expect. So if Premier gets beyond 50,000 of daily production Mr Jamieson reckons it should parcel up hydrocarbon assets and sell them on, returning the capital raised to shareholders via special dividends or share buybacks.
By reducing its scale shareholders can then look forward to another round of exploration-led growth. Cairn Energy, the newly promoted FTSE 100 constituent, epitomises the goal. Resource discoveries on the Cairn scale are rare. But Premier, albeit in a less eye-catching way, is showing it can deliver exploration success.
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At present Premier is using cash flow from selling the oil and gas it produces in the UK, Pakistan and Indonesia to fund an exploration programme, with predominant focus on Africa. Premier’s key focus is off the coast of Mauritania. Premier has a 9.2 per cent interest in a number of promising concessions, including the Chinguetti and Tiof fields where oil has already been discovered. Premier’s partners include BG Group and three Australians, Woodside Petroleum, the operator, Hardman Resources and Roc Oil. At this stage Premier’s net production from Chinguetti, which is planned to come into production in 2006, is only 6,100 barrels a day. The potential for more finds off Mauritania, however, is good and could see Premier approach Mr Jamieson’s self- imposed 50,000 production ceiling. And that spells good news for investors. Buy.
Kier
THE time was that most housebuilding companies had commercial construction arms. The property market slump and interest rate rises of the late 1980s and early 1990s led most building firms to lay off commercial construction and to concentrate on residential. Where commercial construction entities did survive, meanwhile, they disguised themselves as support services outsourcers, or some such thing. It is refreshing, therefore, to see that Kier, the construction company floated out of the Hanson empire in 1996, is proudly operating as a commercial and residential builder. Its strategy of using cash generated by the commercial side to fuel residential building may also raise eyebrows. Some will be surprised to learn that commercial construction was cash generative. The mispricing of contracts, and mid-project respecification, have left many assuming that commercial construction is inherently unprofitable.
The secret to Kier’s success to date comes because it priced projects with profit in mind and then built with efficiency. Public sector work in the form of school and hospital building is providing a solid flow of orders and while the housebuilding side contributes more in terms of profits, the construction activities give investors a safety net should the bottom fall out of the housing market. That said, housing orders in the first two months of the new year are up 43 per cent and that suggests it could be some time before the residential market turns to bite Kier. Buy.