Investment Column: A great bank, but StanChart is too pricey
Tuesday 19 October 2010
Our view: Take Profits
Share price: 1921p (+21.5p)
Is Standard Chartered the world's best bank? It has been said in some quarters, and quite seriously. StanChart has grown profits year on year and, while it didn't exactly laugh in the face of the financial crisis, it sailed through it more smoothly than virtually any other Western bank.
Of course, it's not really a Western bank at all – it is just listed here. The bulk of the business is in emerging markets, and in some of the fully emerged markets of South-east Asia. Yesterday, the group continued to expand by taking full control of the Indian brokerage Standard Chartered-STCI Capital Markets.
The £3bn cash call announced last week came as something of a surprise (it was the second such call in the past couple of years) but what was welcome was its promise to use the cash to protect organic growth and ensure the bank meets the new Basel capital requirements with headroom to spare. There will be no renewed attempt to buy South Africa's Nedbank now that HSBC is out.
So, notwithstanding the rights issue, is all rosy at StanChart? The City certainly thinks so. Ian Gordon, at Exane BNP Paribas, points out that Bloomberg's figures show the average target price set by analysts for the shares is just 1907p, beneath yesterday's close, and yet only one house has an "underperform" on the stock.
On 15 times full-year earnings, the logic of his case is clear. StanChart is anything but cheap (with a prospective yield of just 2.31 per cent). By contrast, HSBC is on 13.2 times and yields 3.4 per cent, while Barclays sits on 9.46 times (yielding just 1.75 per cent).
As a result, we would be inclined to take the profits by selling the rights. Standard is a very good bank but its shares sit at an enormous premium and, while we wouldn't put anyone off from holding the stock, there are opportunities to make better returns out in the market at the moment.
Our view: Hold
Share price: 2069p (+9.5p)
SABMiller, one of the world's largest brewers, yesterday became the latest multinational to raise a glass to soaring sales in emerging markets, which offset a decline in its more mature territories. The brewer of global brands including Peroni and Pilsner Urquell said lager sales volumes jumped by 11 per cent in Africa and by 10 per cent in Asia during the six months to 30 September.
While SABMiller's lager sales received a boost from the football World Cup, pushing them up by 3 per cent over the half-year, lager volumes fell 5 per cent in Europe and were "marginally" lower in Latin America. Still, SABMiller's overall performance was ahead of City expectations. While the 1 per cent growth in lager volumes and 2 per cent uplift in soft drinks over the half-year showed gathering recent momentum after the first quarter, when they both fell, analysts at UBS noted that its "headwinds" in certain markets, such as Europe, persist.
The shares, which have soared this year, jumped again yesterday to close just shy of a 12-month high of 2088p. As a result, they are starting to look relatively pricey on a forecast multiple of 18.6 times 2011 earnings. While SABMiller will continue to toast its growth in emerging markets, we advise caution given its lofty share price and the gathering economic clouds over its mature markets. So just hold.
Our view: Buy
Share price: 95.5p (-2.5p)
Nanoco makes quantum dots. Few readers of this column could pick a quantum dot from a police line-up – the name seems suited to the realms of science fiction, perhaps as a piece of kit found in Back to the Future's DeLorean, or maybe in a Terminator or two. Quantum dots can actually be found in televisions, and are causing quite a stir among television manufacturers. The reason? They offer better colour quality and brightness than white LEDs and use less power. Nanoco has already succeeded in signing up a string of clients in Japan, and now the talk is that it could land contracts in South Korea.
The company is expanding to larger premises so it can move from laboratory-scale production to "volume production", say the analysts at Bank of America-Merrill Lynch. They point out that the group is on track to hit further milestones, including its first kilogram delivery of quantum dots.
Nanoco's stock has long been a favourite of this column and yesterday's results did nothing to change that view. The numbers were on track, with revenues rising from £1.9m in 2009 to £2.9m in the year to 31 July. While the losses rose, analysts are expecting profits by 2012, so buy.
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