Investment Column: StanChart is worth holding on to despite the banking turmoil

PZ Cussons; Premier Farnell
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The Independent Online

Our view: Hold

Share price: 1,434.5p (+20.5p)

While much of the banking sector remains mired in gloom, the emerging markets bank Standard Chartered rolls along. In a trading statement yesterday the bank trimmed its growth forecast a little, owing to the depreciation of Asian currencies against the dollar. But investors should take heart from the fact that it is still doing rather well.

Margins are edging up, bad debts are coming down and StanChart is hiring while others in the sector are busy handing our pink slips. Income growth is running ahead of costs so the company is likely to report yet another double-digit increase in profits early next year. In fact, the lender increased profits throughout the worst of the recent downturn. Some call it the world's best bank, a label that is not wholly unjustified, in our view.

But the fact that it is a bank remains a problem. Bank bosses often appear to run them not so much in the interests of shareholders as in the interests of a small circle of richly rewarded staff.

This is a fundamental issue for investors and it is by no means clear that StanChart is in the vanguard of reform (although you could argue that, given its exposure to parts of the world that are growing rapidly, it doesn't need to take steps in this direction with the same urgency as some of its more Western-centric peers).

A more concrete worry comes from the European sovereign debt crisis. In the worst scenario, the debt storm could hit Asian economies pretty hard; and that would no doubt have an impact on StanChart. Besides, there are fears about Asian companies scaling back investment plans in the current, high-risk environment.

So the bank will have to work very hard to justify its lofty rating. It trades on 1.8 times the "book" value of its existing business. Most UK banks trade at chunky discounts. Even HSBC is cheaper. The earnings multiple (11.6 times forecast full year) is less stretched, and the prospective yield (3.2 per cent) remains acceptable.

Last year we said take profits with the shares at £19.21. Don't expect spectacular growth from here, but those who still have StanChart should probably hold. Although it faces risks, it is far less exposed to the current crisis that some of its peers.

PZ Cussons

Our view: Sell

Share price: 308.7p (-36p)

PZ Cussons, the maker of soap and beauty products, endured a rough ride after rattling investors with a profit warning yesterday.

The group – which owns Imperial Leather soap, St Tropez tanning products and Sanctuary body scrubs – blamed difficult retail trading conditions in its large Australian market. It also suffered in the smaller markets of Greece, thanks to the economy; Thailand, from the floods; and the Middle East, owing to the political unrest.

Of these, Asia was the biggest contributor to the group's poor performance. But these difficulties weren't the only ones. PZ Cussons also said its profits for the half year to 30 November had fallen below expectations because of the continued high cost of raw materials and adverse exchange rate movements in Nigeria, where the Naira currency has slipped against Sterling.

As a result, its house broker, Panmure Gordon, has pencilled in a 13 per cent fall in PZ Cussons's half-year profits to £40.1m and slashed its full-year earnings per share forecast by 8 per cent to 16.3p. And though the share price is down sharply since the start of the year, the stock trades on a lofty forward earnings multiple of nearly 19.

Furthermore, its exposure to the UK consumer and its hefty reliance on oil-based products, with oil prices remaining stubbornly high, makes us even more cautious about PZ Cussons, though we note its full-year profits are expected to be ahead of last year.

Premier Farnell

Our view: Hold

Share price: 175.5p (-2.3p)

We decided to avoid Premier Farnell when we looked at the distributor of electrical products back in the summer. And on the face of it, yesterday's third-quarter results did little to inspire confidence (though admittedly, the company is lapping some tough comparables). Although the figures were in line with expectations, the fact remains that that many of the headline figures were less than cheery.

Adjusted pre-tax profits were down 7 per cent in the third quarter of this year against the performance in the third quarter of last year. Various other metrics were also weaker.

Still, the fact that Premier met expectations is to its credit. It also boasts a robust balance sheet and a healthy yield of 6 per cent. And as we said earlier, comparisons with last year are tough, as then it was boosted by the recovery in its end markets. All this, and the fact that the stock is down sharply since our last note, means we would hold on to the shares that remain in our portfolio. But it's too early to buy.