STANDARD CHARTERED, the emerging markets bank, was always going to be an indirect victim of the Sars outbreak because of its heavy dependence on Hong Kong. Yesterday the bank showed it had regained much of its strength, although it remains cautious about the prospects for a wider recovery in the region.
A fall in bad debts — provisions were down to $308 million (£190 million) from $407 million in the first half — contributed strongly to the 17 per cent jump in pre-tax profits to $741 million. Much of the bad debt relates to credit card fraud in Hong Kong, which was rampant in the years after the transfer of control to Beijing.
The authorities in the former British Colony have at last permitted the establishment of a credit reference agency, which should deter a further run of fraud. But Hong Kong is still not in the rudest of health, a condition reflected in Standard’s first-half numbers. Revenue from its consumer division was down 12 per cent.
Mervyn Davies, the chief executive, believes Hong Kong’s pulse is already returning to normal, but admits that the region and Singapore are now mature markets. Better returns are to be had elsewhere, particularly in India and mainland China. India’s share of pre-tax profits has risen by half to 15 per cent in a year.
Standard is keen for that figure to be higher. While it has a 26 per cent market share among foreign banks, Standard has only 2 per cent of the total market — a pot that is set to get bigger as forecasts for GDP growth in India have been revised upwards to 6.5 per cent.
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Mr Davies has set a target of 20 per cent return on equity, although he has not mentioned any deadline. At present, the number is closer to 14 per cent. How quickly Standard closes that gap will depend on the pace of economic recovery in the US, because this will determine export levels from the region.
British investors have regarded Standard as a proxy for exposure to emerging markets. The performance of the bank’s share price over the past five years maps almost exactly that of the £609 million Templeton Emerging Markets investment trust. Over that period, the bank is up 28 per cent, while the trust is up 31 per cent.
At a price/earnings ratio of 17, Standard is an expensive route into emerging markets, but shareholders like the comfort of dealing with a British company. Take advantage of yesterday’s 3 per cent fall to 774½p to buy Standard, but sell when the stock goes beyond £9.
Smith & Nephew
SIR Christopher O’Donnell, chief executive of Smith & Nephew, put a brave face on his decision to pull out of the bidding for Centerpulse, the Swiss manufacturer of replacement hips and knees. It was an admission that the company could not compete on financial terms with Zimmer, a rival group from the US.
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Investors were delighted and the shares rose 6 per cent against a falling market. But maybe shareholders have yet to consider the longer-term impact of the setback for Smith & Nephew.
On one reading, it reinforces the argument that the UK is destined always to play second fiddle to the US. The US benefits from a far bigger medical devices sector, which boasts substantial companies such as Stryker and Biomet. Shares of the US companies trade at a significant premium to Smith & Nephew’s, which means it is hard to compete for trophy assets.
Now denied the transforming deal that a merger with Centerpulse would have brought, Smith & Nephew may itself fall victim to a takeover by a muscular American, although a deal in the short term is unlikely given antitrust and other issues.
The company has undoubted attractions, not least its pledge to deliver earnings per share growth in the mid-teens over the next three years. The demographics of an ageing population, combined with joint damage induced by exercise, are fuelling the take-up of its artificial hips and knees. Its portfolio of new products will also drive sales. On acquisitions, the firm is sure to focus on small bolt-ons, which have proved profitable in the past.
After yesterday’s rise, Smith & Nephew shares trade on a current year forward multiple of almost 21 times, which seems high enough given that the stock might face some short-term volatility as the retreat from Centerpulse plays out.
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Smith & Nephew has performed well during the past five years and has a viable future as an independent company promising above-average growth. Hold.
Rotork
ROTORK, the specialist engineering business, dropped something of a clanger yesterday. Delivering a perfectly decent set of first-half figures, the company threw a spanner in the works by pointing out that the second six months would depend on the US. Investors interpreted that as a forecast of weakening demand in its second main market and knocked 4 per cent off the share price.
The comments overshadowed the 5 per cent increase in operating profit to £12.3 million, buoyed by strong demand from the oil and gas industry, which was in turn held up by the high price of crude. Rotork makes actuators: devices that allow pipe valves to be turned on and off from a remote location.
Rotork’s other major source of revenue, the water and waste industry, proved to offer less of a bonanza, as business slipped year on year. However, the company remains hopeful that municipal spending on water and sewage projects in America, its most important customer in the field, will pick up shortly. This amounts to pinning one’s faith on an expansion in public sector expenditure.
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All the other indicators are pointing in the right direction: net profit before tax and goodwill was up 6 per cent, the order book has increased by 11 per cent since the end of 2002 and net margins have edged up to 20.7 per cent. Perhaps the biggest attractions of Rotork are its lack of gearing — virtually no debt — and its cash reserve. Rotork has £24 million in the bank.
The stock has underperformed the mid-cap 250 sector during the rally since mid-March. The interim dividend was lifted 5 per cent yesterday, giving a useful 4 per cent yield on the stock. Hold.