Investment Column: Hold HSBC, the quality play among banks

IG Group; Thorntons
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The Independent Online

Our view: Hold

Share price: 661.1 (+6.8p)

In the past two days we have considered Lloyds and Barclays; now it is time to turn to the gorilla in the room. HSBC was in many ways the herald of the credit crisis – the fall of its US sub-prime mortgage business was the harbinger of doom to come.

And yet, while so many of its rivals hit the buffers, HSBC proved remarkably resilient throughout the crunch. What was really striking about its interim results, where it turned a $5bn (£3bn) profit, was the quiet confidence of its executives. It appears they have much to be confident about.

HSBC has an enviable position in South-East Asia, where the tiger economies are starting to growl again and rivals are either giving up or scaling back their ambitions. With recent forecasts of global growth being raised, HSBC, operating as it does in 81 countries, is a natural beneficiary.

The global banking and markets turned in a robust performance and there is much in its favour going in to the second half. Even the sizeable UK business should benefit from the company's ability to offer competitively priced products while others continue to stumble, as evidenced by its recent mortgage launch. The picture is not entirely rosy, however. Bad loans are still crashing in (particularly in the Middle East) and HSCB's own operations *China (as opposed to its joint ventures) are not going as swimmingly as they might. Those quietly confident managers need to be watched carefully too; there is always a danger that they will slip into the hubristic habits of the past that pushed them to embark on the ill-fated US venture.

Nonetheless, HSBC remains the bluest of blue chips. Unfortunately, the shares have risen sharply to reflect this and the valuation (about 20 times this year's forecast earnings, with a prospective yield of 3.3 per cent) is looking stretched. A strengthening pound is also something to be wary of, given HSBC's earnings are dollar denominated. So hold for the moment, but prepare to dive in on any signs of weakness.

IG Group

Our view: Buy

Share price: 352.6p (-20.3p)

Like it or not, there is no getting away from IG Group's delivery. Yesterday's trading update gave a picture of a business in rude health. The downturn has barely effected the company's onward march as it has continued to plant its flag in new countries and grow quickly once it has arrived.

Its turnover for the three months to 31 August was up 28 per cent while its bad debts, always a worry in these times stood, at less than 1 per cent of revenues. Why the caution about the company's outlook then? Well spread betting/contract for difference businesses like IG thrive on volatility and this time last year conditions were very volatile: Lehman Brothers had collapsed and the rest of the world fell into a giant hole with it as markets swung up and down violently.

During this, IG's clients got stuck in and its business soared. It will be very hard to repeat that. It is still volatile out there but less than it was. In the long term, IG has now opened in all the places where regulations make it easy to offer its services. International expansion, such a driver of growth, is going to be harder from here.

Nonetheless, there is still plenty of growth to come. IG has been in France for only two years, for example, so it would be premature to give up on it just yet. At 14 times 2010 earnings, with a tasty yield of 4 per cent, the stock is still not overpriced. The short term might be choppy but we say buy.


Our view: Buy

Share price: 108p (+15.5p)

The chocolatier Thorntons suffered mild indigestion in the last fiscal year. It had to contend with the financial sector almost collapsing in the crucial last three months of 2008, which hit Christmas retail and corporate sales. Franchise operations were also disrupted by the collapse of Birthdays this year, although more than three-quarters of those are expected to have reopened before Christmas.

Despite this, pre-tax profits only fell by 4.5 per cent to £8.1m in the year to 27 June, well ahead of expectations. The board highlighted the fact that it had slashed the operating loss that historically occurs in the second half of the year by 80.1 per cent to £0.6m, following a belt-tightening exercise and development of new products. The final dividend was maintained at 4.85p.

Thortons is not without risk, though. Its gross margin fell by 160 basis points over the year, to 48.9 per cent, and it is exposed to a longer-than-expected slump in consumer spend. It also has net debt of £26.7m, although this is falling. The retailer's shares trade on 12.9 times 2010 forecast earnings, below the sector average of 13.6, and City analysts posted upgrades yesterday, so we cautiously say buy.