The uncertainty surrounding China is yet another body blow for Asia-focused Standard Chartered (LSE: STAN). It has had to cope with troubled financial performance, allegations of wrongdoing from various regulators regarding multiple issues and its outlook is now rather less rosy than it was a year ago. Add to the mix a new management team and the banking star of the credit crunch is most certainly a different prospect right now.
However, despite its problems, Standard Chartered still offers tremendous investment potential. Certainly, it may take time for its compliance function to be successfully overhauled (which is apparently a key aim of its new management team) but for long term investors it is a superb buying opportunity.
That’s at least partly because Standard Chartered trades on a super-low valuation. For example, it has a price to book value (P/B) ratio of only 0.6 which, for a highly profitable bank with excellent long term growth potential, is exceptionally difficult to justify. In fact, while Standard Chartered’s bottom line is due to fall by 36% this year, a rebound of 24% is forecast for next year. This could begin to positively catalyse investor sentiment in the coming months and stabilise the bank’s share price after its fall of two-thirds in the last five years.
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In addition, Standard Chartered also has a great yield, with it due to be as high as 4.6% next year. This is considerably higher than the yield offered by BT (LSE: BT-A), with it being expected to yield 3.8% next year. In fact, a higher yield is not the only reason why Standard Chartered appears to be a better buy than BT. The latter trades on a rather unappealing valuation, too, with it having a price to earnings (P/E) ratio of 13.3 despite its profit being forecast to fall by 3% this year.
Certainly, BT has a bright long term future and its investment in a mobile network, superfast broadband and pay-tv (plus sports rights) is likely to position the business as the dominant quad play offering in the UK. However, the risk is that BT boosts its top line but fails to deliver the same rate of growth in its bottom line, with highly competitive deals and high levels of investment having the potential to put margins under pressure.
Similarly, Euromoney Institutional Investor (LSE: ERM) is struggling to grow its bottom line and, as today’s update from the financial services information company shows, its full-year profit is now due to fall versus last year. Pretax profit is expected to fall from £116m last year to £107m in the current year and, looking ahead, growth of just 3% is being forecast for next year.
This puts Euromoney Institutional Investor on a price to earnings growth (PEG) ratio of 5.3, which indicates that its shares may be fully valued at the present time. Certainly, it is a sound business with significant long term appeal. But, while a downturn in the energy sector is being partially offset by impressive performance from its asset management and investment banking divisions, its shares may fail to post index-beating returns in the near term.
As such, Euromoney Institutional Investor seems to be worth holding on to for existing investors, while Standard Chartered appears to be a strong buy at the present time. For investors in BT, though, the risks seem to outweigh the rewards right now and there may be better opportunities to make gains elsewhere.
