Investment Column: HSBC's new boss is taking the right steps

HR Owen; Fusion IP


Our view: buy

Share price: 511p (unchanged)

Shares in banks have fallen precipitously in recent weeks, and no wonder. With fear stalking markets thanks to the sovereign debt crisis and renewed worries about the possibility of a double-dip recession, no one is sure how a banking system not long off the critical list will cope.

But if there is one bank that can handle the worst, it is HSBC. The group sold its US credit card business to Capital One last week for a $2.6bn (£1.6bn) premium to the $30bn face value of the loans. The price is not high by historical standards, and the operation was profitable throughout the credit crunch, but the company will still book a nice profit.

We also like this move because it shows that the new chief executive, Stuart Gulliver, is prepared to take a hard look at all of HSBC's businesses and ask whether or not they are good for shareholders. There is a lamentable tendency among mega-corporates like HSBC to indulge in empire building. The deal suggests Mr Gulliver could avoid this trap.

On valuation grounds, HSBC trades at a chunky premium to the other big UK-listed banks (except Standard Chartered) on virtually every metric. For example, HSBC trades at about 11.5 times forecast 2011 earnings; the others are all under 10.

However, it offers a prospective yield that none can match: just over 4 per cent. While the current turmoil might mean dividend growth will be less than hoped, the yield doesn't look under any threat, not least because of HSBC's enviable financial strength.

The bank is also perfectly positioned to take advantage of the shift in economic power from West to East, has a profitable UK business that could capitalise on weaker rivals, and has little exposure to Europe. Its US pullout has been rapid.

We said HSBC was the pick of the sector last August. While the shares have fallen since then, this should be viewed as a buying opportunity.

HR Owen

Our view: hold

Share price: 79p (+1p)

HR Owen, the luxury car retailer, boasted "real momentum" behind its new strategy yesterday, as it lifted its first-half profits despite the "challenging economic headwinds".

The group, which oversees 13 sales and 15 aftersales franchises for luxury brands, reported pre-tax profits up by 8.5 per cent to £1.7m for the six months to 30 June, on revenues of £93.1m. It was boosted by an uplift in sales of new cars, notably Ferrari and Bentley models, and an uptick in used car margins.

The improved performance was promising because HR Owen – whose other brands include Lamborghini and Maserati – only unveiled its new "Experience is Everything" strategy at the annual meeting in May, with a new focus on becoming a luxury brand for car ownership, maintenance and use over a vehicle's life cycle.

Under its new chief executive, Andy Duncan, the former chief executive of Channel 4 who joined HR Owen in October, the group also acquired Broughtons of Cheltenham – the small Aston Martin and Bentley specialist – for £1.5m in July, as it continues to reshape its dealership portfolio.

That said, while we note HR Owen's positive words yesterday on a "progressive dividend" strategy in the years ahead, its forward earnings multiple of 12.6 makes us cautious until its recovery starts to really motor.

There is certainly a lot of promise here that firmly argues against a sell stance on this stock, but, given the jitters across the markets, we would rather just hold for now.

Fusion IP

Our view: buy

Share price: 23.5p (unchanged)

Investing at an early stage can sometimes pay off dramatically, but it is fraught with risk.

Fusion IP gets around this by involving itself in a range of different businesses. The group owns rights to research produced at Cardiff University and the University of Sheffield, which it then aims to turn into profitable businesses.

Yesterday's trading update provided the latest on its companies, with Simcyp – which produces software that simulates how a new drug is likely to react with other drugs – among the highlights. The group is expected to see its full-year pre-tax profits grow by more than a third, while elsewhere, the magnetic gear developer Magnomatics' turnover for the calendar year is predicted to rise 70 per cent.

Fusion's portfolio appears to be in good shape and, with hopes that the company might sign up another Russell Group university, Fusion could well prove a good speculative punt, although patience will be required.