The Investment Column: RBS is the most lowly valued bank in Europe - and it should not be

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The Independent Online

Sir Fred Goodwin, it is said, has been more than a little miffed for quite some time about the treatment meted out to his Royal Bank of Scotland by the City's big investors.

The tumultuous applause that greeted his audacious takeover of the flabby National Westminster Bank in 2000 has long since turned to a slow hand-clap.

The shares, still riding high in 2002 at a touch north of 2,000p, were then given a sharp Glaswegian kiss on concerns over its spending spree, notably in America.

They now trade at just 8.3 times expected 2007 earnings, giving RBS one of the lowest ratings for any European bank.

Ian Gordon, a banking analyst at Dresdner Kleinwort Wasserstein, summed up the cause of Sir Fred's chagrin. "There is an old saying that if you look after the company, the share price looks after itself," he told clients. "But the RBS share price seems to defy this law."

The shares languish at a similar level to five years ago, despite earnings more than doubling during that time. They were marked 19p lower to 1,692p yesterday, albeit in a generally flaccid market, despite RBS's pre-close trading statement that seemed to say all the right things.

No major new acquisitions are on the cards, bad debt is finally levelling out if not yet peaking, and the bank is comfortable with current profit forecasts (of more than £8bn) for this year.

Corporate banking is growing nicely, while its US Citizens consumer lending business is on track.

RBS's capital ratio - a concern for some time after expansion sponged up free cash - is improving. That, Sir Fred said, brought the prospect of share buybacks a step closer.

He continues to run a tight ship, and costs at RBS are screwed down to among the lowest in the sector.

A narrowing of net interest margins - the difference between the cost of lending and borrowing - had slowed after writing more mortgages and corporate loans. At 4 per cent, the yield is a touch off the pace, but it is growing at a healthy 15 per cent a year.

Meeting expectations may often no longer be quite good enough - rivals HBOS and Alliance & Leicester have already said they will do better - but almost every sector analyst still rates the shares a bargain. Buy.

Leave Alea alone as it crumbles

Alea, the Bermuda and London-based reinsurer, is already a shadow of the company which floated on the London market two years ago. Having run out of capital this summer, and failed to persuade investors to back it through an equity fundraising, the company has spent the past few weeks selling off the remaining parts of its active business, and preparing to put the remainder into run-off.

It tied up a deal on the rights to its European division yesterday, and now has just the licences from its US business to sell.

Once the upheaval is finished, all that will be left is several hundred millions of pounds of legacy insurer policies, each of which will eventually expire, carrying it towards extinction. In the meantime, investors in Alea are betting on two things: claims on the existing book remain at a favourable level; and that performance of the invested premiums is strong.

As the company moves towards wind-up, money will be handed back to shareholders - compensating for the inevitable crumbling of the company's share price.

Working out the true valuation today, therefore, is no easy task. Analysts put it at between 80p and 120p. By the close of play yesterday, the stock was trading at 106p.

There may be money to be made on Alea, but this is a risky bet. It would be surprising if there were not still more nasties to emerge from Alea. Avoid.

Buy Computerland for its IT outsourcing arm

From a distance yesterday's interims from Computerland UK do not look particularly impressive.

The IT services group registered a 30 per cent slump in pre-tax profits to £800,000 and a 10 per cent fall in sales.

To blame was a poor performance at its computer resale division which has had its margins squeezed by the ongoing falls in PC prices. Although trading at this business has stabilised in recent months it is likely to decline further in the future.

Computerland shareholders should not despair. By far the group's biggest division sees it offer organisations a one-stop shop for their IT needs. This side of the business has registered growth in every one of the past 12 quarters and there is no reason why this trend will not continue as more and more public- and private-sector enterprises outsource their IT requirements. Computerland is now totally focused on growing this business.

It already boasts a series of blue-chip clients and management predicts it will become an evermore dominant part of the company, thereby more than making up for the weakness on the computer re-sale side.

At a group level, Computerland enjoys strong cashflows. In the first half it achieved an inflow of £700,000 allowing it to raise its interim dividend by 6 per cent to 1.8p a share.

With the shares at 135p, the company trades at 11.9 times forecast earnings for this year. Given more than half of Computerland's market capitalisation is accounted for by its £7.8m cash pile, this is not expensive. Buy.

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