Take a long-term view at Standard Chartered

Xansa just a hold in flat trading; Life is a lottery at chastened XTL

Stephen Foley
Thursday 26 June 2003 00:00 BST
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While the people of the Far East have fought off the Sars virus, it may take some time for their countries' economies return to full fitness. And that could mean that Standard Chartered, the Asia-focused bank, continues to feel under the weather for a while yet.

The bank is spending this week chatting to the City analysts who follow and forecast its results, to warn them the issue of personal bankruptcies in Hong Kong is far from settled. This has been one of the biggest headaches of the last few years. Privacy laws in the former colony meant card issuers couldn't find out how many cards anyone had and Standard Chartered, like other lenders in the territory, has had to shoulder some big bad debts. Since Hong Kong accounts for a third of the bank's profits, the sudden jump in bankrputcies last month, after a long downward trend, is worrying. Sars has prompted a sharp revision of economic growth rates and the unemployment rate has jumped. There could be more pain to come for Standard Chartered, as jobless Hong Kong citizens struggle to keep up with card and mortgage payments.

Happily, growth in other areas is making up for the problems in the former colony, and half-year results, to be published in August, should show that Standard Chartered is still on course to post a 2003 profit somewhere around the consensus forecast of $1.38bn (£822m). Consumer banking in markets such as Malaysia and Thailand and, further afield, the United Arab Emirates, were all singled out yesterday for their strong performance.

The wholesale banking side of Standard Chartered is growing both revenues and profits and central costs are coming down across the group. Administrative functions have been centralised in giant offices in Kuala Lumpur and Chennai, India. The bank is edging closer to its target of keeping costs to half income.

The Asian economies as a whole have stayed robust and Standard Chartered's emerging markets focus makes it a good long-term play. Hold.

Xansa just a hold in flat trading

Alistair Cox has had a lot on his plate since he was made chief executive of the IT services firm Xansa. His first nine months in the job have seen him swing the axe in the face of extremely tough market conditions.

The company installs IT systems for businesses and is also getting into something called "business process outsourcing", which involves taking over whole chunks of a company's administration. Among Xansa's BPO work is a deal with a credit card firm where its IT identifies whether dubious credit card transactions are errors or fraud. BPO will be lucrative, but it is not Xansa's main game yet.

Yesterday's annual results made grim reading. Pre-tax profits, before one-offs and goodwill, plunged 40 per cent to £27.7m after sales fell 12 per cent to £453.9m.

The figures were helped by the cost-cutting which ended up having to be more severe than first outlined, with 500 employees shown the door. Xansa will now save £27m a year, up from the £20m-£23m originally flagged.

Including a recent contract with the Royal Mail, Xansa's order bank ­ contracted orders not yet recognised in the accounts ­ stands at £620m, of which £230m should fall into the current year. On top of that the company is bidding for about £1bn of IT work.

But Xansa isn't likely to raise investors' smiles just yet. There are no real signs market conditions in the UK ­ which accounts for more than 90 per cent of the group's revenues ­ are getting any better. Consequently, analysts are expecting sales to be flat this year on last year's level, although they expect a marginal improvement in earnings to about 6p a share.

That puts the shares, down 8p to 86.5p, on a forward rating of more than 14 times. Mr Cox seems to be taking all the right steps to revive Xansa's fortunes but until market conditions are also on his side, the stock remains a hold.

Life is a lottery at chastened XTL

XTL Biopharmaceuticals, the Israeli drug developer with a specialism in hepatitis, has fought off an attempt by rebel shareholders to oust the management and consider winding up the group. Will that be a good or a bad thing?

We will only know for sure at the end of the year, by which time the chief executive Martin Becker has promised to licence its main drug (to fight hepatitis B in liver transplant patients) to a deeper-pocketed pharmaceuticals group in return for milestone payments and royalties. If there's no deal, there may not be a viable company here either.

The trouble is that XTL has just two products being trialled on humans and neither has yet been tested on a large number of patients. Never mind the science; the odds are stacked against the drugs reaching the market. A third product, which has looked promising when tested on mice, will start human trials next year.

And that's your lot. XTL is going to cut pretty much all its other research work to eke out its £20m cash until 2006. Chastened directors are even taking a 10 per cent pay cut.

The bull case for XTL is that the valuation doesn't even reflect the cash it has in the bank, let alone the prospect that it might have a viable drug on its books. Both hepatitis B and C are serious conditions where new drugs could sell well. But an XTL share ­ yours for 10.25p ­ is nothing more than a lottery ticket.

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