STANDARD CHARTERED sticks out like a sore thumb. It is the only UK quoted bank with no UK business. Its shares, meanwhile, trade at a premium to all UK listed peers and the premium compared with high street clearers and mortgage banks is substantial. Standard shares change hands at the equivalent of 14.5 times prospective earnings. The closest rival is HSBC, whose shares sit on a forward multiple of 13. The weighted average prospective p/e ratio for the UK banking sector, however, is 10.5. The same valuation patterns, incidentally, can be seen when banking sector dividend yields are compared.
HSBC and Standard Chartered both have exposure to emerging Asian markets, and that fact goes some way to explaining why shares in the two firms are chased harder than peers whose interests are focused on UK or Western economies. Those emerging economies, after all, have better growth prospects.
Standard Chartered’s trading statement of yesterday served to reiterate the growth potential. While Standard’s revenues are rising at about 10 per cent a year, some rivals are struggling to grind out low single-digit percentage growth. But while the emerging market growth prospects are exciting, the risks of failure are also commensurately higher. That it is not to say the Standard risks are high, let alone unacceptably high. But it would be understandable if the added risk led investors to peg Standard shares at a discount to other banks.
This may lead investors to assume that Standard shares are expensive. If you subscribe to the unreasonable view that Standard’s operating costs are rising too fast, and that the Khoo family stake forms an unpleasant stock overhang, the shares will almost certainly look dear.
There is another way of looking at the price differential. Standard shares may be priced fairly and it is the banking sector that is undervalued. In many ways this is more credible. After all, Standard shares sit almost exactly in line with the UK market average. Meanwhile, the prospects for earnings and dividend growth at the likes of Barclays, HBOS and Royal Bank of Scotland are no worse than at Standard.
Advertisement
Standard shares, especially given the intelligent and assertive way the bank is run, are not expensive. They should be held.
Brambles
AN IN-LINE trading statement should not fuel much in the way of share price movement. But shares in Brambles, the Anglo-Australian distributor of the pallets upon which groceries are carried to supermarkets, tumbled yesterday. The financial outlook for the year to June 30 was unchanged, Brambles said, and both profit and cash generation should show “good progress” when the results are published on August 24. But it seems that investors expect positive surprises every time a company updates the market. Confirmation that expectations will be met is seen as nothing more than an opportunity to take profits. Brambles shares fell 3 per cent.
Brambles, of course, is still recovering from the missing pallets fiasco of three years ago and since then has tried to restore profitability and market credibility. Back then the company had to admit that its Chep pallet division had mislaid 14 million pallets, forcing a profit hit and resulting in a major internal reorganisation.
There was no mention of missing pallets yesterday. Brambles said that Chep’s performance remained on track, delivering solid sales and profits across all regions, including a very strong term in America. Cleanaway’s full-year performance will be below last year’s efforts, as flagged previously, while the recall and industrial services divisions were also on track to meet earlier promises.
Advertisement
There was no guidance on the outlook for 2005-06, much to the chagrin of investors who are expecting full-year profits in the year to June 30, 2006 to increase 15 per cent on the soon-to-be reported figures.
Brambles shares have more than doubled since the Chep pallet fiasco and have outperformed its peers over the past year. Analysts expect Brambles to produce an adjusted £365.5 million pre-tax profit this year, or 14.7p a share. On that measure, Brambles is trading on a 21 times forecast multiple, dropping to 18.6 times for 2005-06. The prospective dividend yield of just under 3 per cent does not help the feeling that its share price is more likely to drift lower than bubble higher. Sell.
Vectura
AS LONG as there are companies such as Vectura, the drug developer that specialises in delivering medicines via the lungs, there is hope for the British biotech sector.
Since floating on AIM last July, the company has successfully completed tests on a new treatment for chronic obstructive pulmonary disease (smoker’s cough). It subsequently licensed the treatment to Novartis, the Swiss drugs giant, in a deal that could be worth at least $187.5 million (£103 million). Further royalties will fall due if Novartis succeeds in combining the treatment with its antibiotics.
Advertisement
Vectura has also edged its experimental treatment for erectile dysfunction further along the pipeline and breathed new life into a treatment for Parkinson’s disease by reformulating the drug into a fast-acting powder that can be inhaled.
More of the same is promised for the current year, including another big-hitting licensing deal — this time for GyroHaler, its puffer technology — that could be worth more than $150 million. On a discounted cash flow basis that alone should be enough to give the shares a leg-up through 100p, compared with 84p now.
The company has enough cash to see it through to the end of 2007 and regular milestone payments from Novartis should further bolster its finances. Meanwhile, losses next year are forecast to narrow by about two thirds to £3 million.
Provided the management, which makes little secret of its impatience to strike more deals, does not let this early success go to its head, the future will remain bright. Buy.