The debate over whether the state will get back the 502p a share it paid for 81 per cent of Royal Bank of Scotland in 2008 is a peculiarly pointless and sterile one.
First, the bank is not the same as the one we took control of. Second, we are where we are. The investment was a forced one and the investors, that’s us, took a loss. There is little point in sitting on our hands until RBS shares reach that hypothetical £5 figure, because they may not. The sale of 5.4 per cent may even put upward pressure on the price, by focusing the market on the shares, so gaining more from subsequent sales.
The institutions were happy enough to pay 330p a share. The discount was not a colossal one, as they closed off 1½p at 339p last night. Retail investors will have to wait until next year for a heavily discounted “Tell Sid”-style sale. There are reasons why they might consider pre-empting that and buying now.
First the negatives. There is always the chance of another heffalump trap opening up, some further awful malfeasance by the bankers. Of the known unknowns, the most pressing is more action by regulators on past misdeeds, specifically over residential mortgage-backed securities sold in the United States, a legacy of the sub-prime crisis. The bank warned that this could prove more expensive than hoped at the halfway figures last week. The positives are the relative ease with which RBS has extracted itself from Citizens, the US bank, where it retains 22 per cent. It has to sell off 316 Williams & Glyn branches, but the market seems good enough for assets like these.
There is further cutting to be done at the investment banking side and at some point the bank will have to ring-fence its retail operations — again offering no significant logistical challenges.
RBS has one of the strongest balance sheets in the sector. Its common equity tier 1 ratio, the best measure, is 12.3 per cent, but rises, if like some analysts you assume the sale of the rest of Citizens, to above 15 per cent. The bank has said excess capital will be returned to investors.
Finally, the discount of the shares to assets is ahead of many other European banks. Those City institutions are unlikely to rue this weeks’ purchases.
22% remaining stake in Citizens
330p Sum paid by institutions
MY ADVICE Buy
WHY Balance sheet strength should allow eventual returns to investors. Shares sale should focus attention on RBS to shares’ benefit
The market for selling new cars in this country is about as favourable as it has been since the financial crash. Britons are spending on big-ticket items again. There is plenty of cheap finance, leading to increasing levels of “churn”, as owners get to the end of loan periods and simply trade in their car for a new model.
In addition, the depreciation of the euro has given continental manufacturers a 7 per cent rise in margins over the past year. All this makes the UK one of the best markets to sell into, with new car sales up 7 per cent in the first half.
Pendragon could hardly fail to benefit, with underlying pre-tax profits for the period up by almost 23 per cent to £40.3 million. The company also has been increasing its share of the second-hand market.
It has a small exposure to the southeast and plans to expand the number of sites by 40 over the next five years. Finally, the balance sheet is now so strong that it is having to look seriously at how to allocate excess capital. The shares, up 2¼p at 41¼p, have risen from about 30p at the start of the year. Nothing wrong with taking profits, but they should have further to go.
Revenue £2.3bn
Dividend 0.6p
MY ADVICE Buy long term
WHY Expansion plans and strong UK market for cars
Today’s victim of the tumbling oil price is Rotork, another engineer that operates globally but is little known outside the sector, making valves, actuators and controls for industrial facilities.
The damage from the oil price, however, is fairly limited, given that half of all sales come from that sector and two thirds from the most affected part of the business, fluid systems.
Rotork’s strength is that it serves a large number of different markets, within oil and gas and outside. In the first half, demand for its products continued as projects already in train continued to be built.
This rather suggests that there may be more pain to come as capital spending is cut further. The euro is another drag, about a third of business coming from the Continent. The order intake in the first half fell by nearly 13 per cent at constant currency rates and revenues were off by 5.4 per cent. Profits before tax fell by 9 per cent on the same basis to £56.3 million.
On the plus side, Rotork has cash in the bank and now looks like a good time to make acquisitions — there was a small infill purchase of a valve maker from Spirax Sarco, a fellow engineer, too. Earlier deals led to a healthy rise in orders, revenues and profits at its instruments division.
The company has responded by instituting £8 million of cost-cuts. The shares, up 6p at 222p, have come back from above 280p late last year, hardly a catastrophic decline given that oil and gas exposure. They sell on 18 times earnings, but it looks too soon to buy.
Revenue £274m
Dividend 1.95p
MY ADVICE Avoid for now
WHY Shares are still exposed to bad news from oil and gas
And finally . . .
Hargreaves Lansdown has been analysing where investors have chosen to invest their pensions, four months on from being given the freedom to do so. Interestingly, although two thirds have been playing it safe by buying managed funds, some have been buying individual equities to build their own portfolios. The most popular stock has been Lloyds Banking Group, despite having only just returned to the dividend list, with investors positioning themselves, presumably, for the expected near-5 per cent yield next year.
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