Investment Column: RBS in need of more than Hester's clarity

Galliford Try; Falkland Island Holdings
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The Independent Online

Our view: Sell

Share price: 55.85p (-1.1p)

The last of the big banks is the biggest basket case. At least Royal Bank of Scotland has not made any false attempt to prettify itself. It is in a mess and its chief executive, Stephen Hester, has made no bones about that fact. What are the prospects of him making the £10m or so he stands to pocket if he can turn the company around?And is it worth investors taking a punt on him pulling it off by buying in now?

In the company's favour (unlike that other part-nationalised bank Lloyds TSB) is that at least with RBS you know where you are. Mr Hester has made no bones about the fact that it needs to go into the Government's asset protection scheme, and there is no wild rumour mill spinning around the company about capital raisings or big disposals. There is also no dividend (and no prospect of one for some time) and no profits either, with Mr Hester warning that impairments are likely to rise steadily – a marked contrast to what Lloyds TSB has said. Mr Hester has offered clarity, but no certainty.

Of course, as a new broom facing criticism about his salary, it makes a lot of sense for Mr Hester to manage expectations down, so in six, 12 or 18 months he will look good as the bank recovers. This needs to be borne in mind when considering what he said. It is hardly worth looking at price to earnings as a way of valuing RBS given the uncertainties, particularly regarding bad debt. But Oriel Securities suggests that the shares should have a book value of 58p, falling to 53p next year and recovering to 58.5p in 2012. Given the bank's targets, Oriel reckons a medium-term rating of about 1.5 times book should be achievable if those targets are met.

The shares have recovered strongly recently. Although the economic outlook appears better than it was and RBS should benefit, we are wary of backing the lender at these levels until there is a bit more certainty to go alongside Mr Hester's clarity. So sell and consider again if the shares show weakness.

Galliford Try

Our view: Hold

Share price: 70.5p (+0.75p)

Much like the 1980s, all of a sudden the housebuilders are back in vogue. The sector has spent much of the past year breeching debt covenants, writing down valuations and seeing share prices fall through the floor. But the industry has been revitalised recently by the improving, if still rather nervous, sense of wellbeing engulfing the markets. Watchers at various brokerages are upgrading.

Galliford Try, which issued its preliminary results and announced plans to raise £126m in a cash call for a land grab yesterday, is no different with its stock up nearly 100 per cent in the past six months. While the numbers were in line with expectations and the rights issue is probably a good idea, the market was not in raptures. True, it could be down to a bit of good old-fashioned results day profit-taking, but there are those that think others in the sector offer a spicier alternative.

Galliford's finance director, Frank Nelson, argues that the company has been one of the industry's stronger performers throughout the downturn and most of the analysts agree. But those at Panmure Gordon say punters should sell. "The 2009 price-earnings ratio is 16 times rising to 16.3 times, which reflect very low earnings expectations for its housing operations," it said in a note. "This also means it trades at a premium to its peer group. We assume a halved full-year dividend but even then the shares yield 2.2 per cent." We would be kinder. The group is one of the stronger names in a recovering sector. Stick with it and hold.

Falkland Island Holdings

Our view: Buy

Share price: 310p (+50p)

Falkland Island Holdings, whose roots stretch back to the 1850s, could best be described as a diversified conglomerate of monopoly businesses. Its quirky collection of operations is not limited to the Falklands either. It fishes squid off the coast of its home island, as well as operating an insurance broker and retail and property businesses. London-based Momart ships works of art and it runs the Portsmouth Ferry Company.

So far so dependable for earnings. The interesting bit is its 15 per cent shareholding in Falklands Oil and Gas (FOGL). Investors may look at the conglomerate instead of a direct investment in FOGL because it has a diversified income stream, an 8p dividend and doesn't rely on a big find. If there is one, however, shares will soar.

The chairman, David Hudd, said yesterday that results in the Falklands were weak but were balanced by a stronger performance elsewhere. He added at the AGM that the group was expected to hit targets for the year. Property sales are expected to lift the fall in underlying pre-tax profits.

The company is trading on only 3.5 times its estimated enterprise value to Ebitda for 2010, which it is undemanding its given potential growth a solid dividend and opportunities. Although yesterday's gain might have taken out much of the near-term upside. its prospects look good, so buy.

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