The Investment Column: Kick up the backside may put HSBC back on the right track

Investec; Win
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The Independent Online

Current price: 909p (-5p)

Our View: Buy

It's hard not to feel a certain Schadenfreude at what HSBC has been going through in recent months – if ever a company deserved to be punished for its hubris it is this one. Rocked by the first profit warning in its history thanks to its purchase of a US sub-prime lender (Household) that signalled the start of the current banking crisis, it has been on the back foot ever since.

However, there are now grounds for reassessing the company's potential as an investment. While HSBC suffered badly from Household, it does not appear to have quite the problems some of its rivals have been grappling with and efforts are under way to improve things (management has already been shaken up).

What is more, thanks to its Asian businesses, HSBC is actually top heavy when it comes to deposits (Collins Stewart's Alex Potter puts the excess at £20bn-£30bn). The current credit crunch has been caused by banks refusing to lend to each other, making it difficult for some (such as Northern Rock) to refinance loans. With its robust capital base, that does not matter to HSBC. It looks like a very safe place for one's cash.

Some of activist investor Eric Knight's recent demands – such as calling on the bank to switch resources into Asia – are being addressed and should provide good news down the line. Yesterday's announcement of a focus on organic growth to build retail presence in Japan is also welcome.

HSBC currently offers a prospective yield of 5.3 per cent based on the estimated 2008 payout. At 10.5 times 2008 earnings it is expensive compared with UK banks (on six to seven). But, for the reasons above, the premium is deserved and HSBC is much cheaper than Standard Chartered (also Asia-focused) on 14 or so. If management responds in the right way to the kick up the backside Knight has provided, HSBC could look like a screaming buy in 12 months. We have been sellers of HSBC for a while now. Time to start buying.


Current price: 517.5p (-11.5p)

Our view: Sell

Investec has its own problems with "subprime" lending having this year bought a UK subprime lender (Kensington) at the worst possible time. Yesterday the company admitted it would have to downgrade its profit expectations for the business but was busy telling everyone that the lender accounted for only five per cent of its overall portfolio.

The company, which operates in South Africa, UK and Australia, said it was in "fairly good shape" in the face of the credit squeeze with diverse operations in diverse territories and a decent amount of cash to boot. And with the Australian and South African operations, at least, looking in fair shape (the UK was rather disappointing) it could be worse.

Still the substantial securitisation business will be badly hit by the credit crunch and other investment banking operations may suffer as companies chose to ride out the choppy markets by sitting on their hands. Investec went like a train when we last looked at the business jumping from 588p to 750p. Since then though, the shares have fallen off a cliff.

It is tempting to sit tight and see the stock as a recovery play. Kensington, for example, is set to benefit from higher prices and less competition. At just over eight times this year's full-year forecast earnings and yielding a more than respectable 5.5 per cent, Investec is hardly expensive. It is just that in the current climate sentiment is negative and it is hard not to see the shares falling further before they start to improve. Investec is certainly worth watching for any sign of a pick up but for the moment. Sell.


Current price: 196.5p (Unchanged)

Our view: Risky buy

Investors dipping their toes into the volatile mobile content sector over the past couple of years might feel rather nervous about braving those choppy waters again. However it is important not to tar all mobile content developers with the same brush. Win has been through some twists and turns, most notably at the start of 2006 when the loss of a significant contract with T-Mobile threw the company's finances into disarray. However under a new management team, it has improved its performance by focusing on the enterprise market and interactive mobile services.

Win is already profitable with cash in the bank. Yet rather than resting on its laurels, the company has decided to go on an acquisition spree, starting with Swiss content developer Quattrocomm for £2.4m in cash and shares. The deal will expand the company's geographical reach. With Win strong in the UK and eastern Europe and Quattrocomm operating in Germany and other central European countries, the two companies are a good fit.

Given that it operates in such a turbulent market sector, Win trades at a bargain basement valuation of just over seven times projected 2008 earnings. It remains dependent on customer take-up of data services and its network partners promoting new products but brave investors could do worse than placing a bet on Win to win. Buy.