There is, you might think, not much point in buying something now when you can get it cheaper next year. At this stage, the structure of the sale of the government’s 79 per cent stake in Royal Bank of Scotland is largely guesswork, but the assumption is that some shares will be slipped out to City institutions, along the lines of the gradual diminution of the stake in Lloyds Banking Group. Some time, probably next spring, there will be a Sid-style sale of a large stake to the retail investor.
This will have to be priced at some sort of discount. Let us assume, along the lines of the sale of rival bank TSB, that the shares go out with a one-for-ten loyalty share, to be handed over a year hence. This is an effective discount of 10 per cent. If you do not believe that RBS shares will gain amount over the next year, the logical strategy is to put the funds you wish to invest in a high-yielding stock until then and sell them to invest the proceeds in RBS.
There are reasons, though, why the shares may well appreciate by that much. They added 6¾p to 361½p yesterday, as some of the uncertainty around that state stake overhang was resolved. As more shares reach what is a fairly illiquid market, interest in them should grow.
There are two reasons to worry about RBS. It still owns 41 per cent of Citizens, the US bank floated in the autumn, and these will gradually be sold. Citizens, though, has done well since the float, gaining 30-odd per cent.
RBS is targeting a common equity tier 1 ratio of 13 per cent, the key metric. This was 11.2 per cent at the end of last year, and further Citizens sales should allow it it hit that target, to the extent that some analysts think it will have surplus capital in 2016.
The second concern is further regulatory fines, to do with the mis-selling of mortgage bonds in the US. RBS has £1.9 billion set aside for this, and my hunch is that the risk is already in the share price.
Against this, the bank has a strong exposure to an improving UK economy and the SME sector, further cost cuts available from its investment banking division and the possible writeback of provisions from earlier bad loans. On balance, I would be inclined to buy now, though no investor should sit out that Sid-style giveaway.
Size of Citizens stake 41%
MY ADVICE Buy
WHY Eventual retail sale will be at a discount, but with some of the uncertainty lifted there are good prospects for the shares in the meantime
WS Atkins, as I have suggested before, is a classic early cycle business, because the consultant is brought in at the start of big infrastructure projects or new product launches. It has therefore done spectacularly well over the past year or more.
There are two measures by which its peformance can be assessed, cash generation and margins, and both were ahead in the year to the end of March. All profits are translated into cash immediately, which suggests clients are happy to pay on the nail, and the amount of cash generated rose by 40 per cent.
Atkins is three years into a five-year programme to raise margins to 8 per cent. That target will plainly be met; they increased to 7.6 per cent last year, mainly by the sale of underperforming businesses such as UK highway services.
As with any global business, there are always weak points. As its client Airbus ramps up production, there is a hiatus in design work in UK aerospace. In China, anti-corruption measures are slowing the pace of decision making. The energy division gets 40 per cent of its work from oil and gas, though much of this comes from the upkeep of existing facilities.
Positives include the near completion of contract negotiations over work for Network Rail and a recovery in the Middle East. Atkins raised underlying pre-tax profits by almost 15 per cent to £121.9 million.
The shares, up another 16p to £15.08 and selling on 15 times earnings, have come up from little more than £12 this year and might merit some profit-taking.
Revenue £1.76bn
Dividends 36.5p
MY ADVICE Take profits
WHY Shares are highly valued after sharp rises this year
The sum of £350 may seem to some people like a lot for a handbag, but it is about the cheapest on offer from Mulberry. Prices go significantly higher; indeed, the company’s problem over the past couple of years has been that prices were pushed too high, more than half its range cost over £1,000, to a point that ordinary customers were disinclined to search its shops for anything cheaper.
This led to profit warnings and the departure of the chief executive. Prices have been reset, two thirds of the range at between £500 and £1,000, but Mulberry has had to report a collapse in adjusted profits in the year to the end of March from £17.4 million to £4.5 million.
This year is not going to be much better because of the need to invest in new store openings. There is a new management team, and prospects are good, like-for-like sales up 7 per cent in the second half as the new pricing came in and 15 per cent since the start of the new financial year.
The shares, well above £10 at the end of 2013, have recovered, adding another 2p to 907p. They do not sell on any meaningful multiple, and the rise in the price does not suggest any compelling reason to buy.
Revenue £149m
Dividend 5p
MY ADVICE Avoid
WHY Much of the recovery appears to be in the price
And finally . . .
At the start of the year some brokers were becoming concerned at Halma’s exposure to oil and gas and worried that its long run of growth and successful acquisitions might not be sustainable. Halma makes controls that go into essential safety devices, and the latest results show no slowdown, while the shares have been strong performers all year. Collapse of sceptics, then; the figures show revenue growth in all four business sectors, and the 35-year run of rising dividends continues unchecked.
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