In recent years I’ve thought Royal Bank of Scotland (LSE: RBS) shares too expensive, mainly because they’ve attracted valuations similar to those of Lloyds Banking Group, while at least a year behind in terms of recovery from the banking crisis. But a long correction starting in February 2015 has sent the price down 43% to 237p, putting the shares on a prospective P/E of 12 for 2016, dropping to just over 10 based on 2017 forecasts — so has the slide been halted and is RBS set for recovery?
Full-year results released on 26 February didn’t help, with the shares losing 7% on the day, after the bank announced a £2bn loss — although it did shoulder restructuring costs of nearly £3bn during the year. But RBS’s recovery should start gathering strength in 2017 with a 19% rise in earnings per share on the cards, and restructuring costs should start to drop off that year after another £1bn charge expected in 2016.
There will be a 2016 stress test to get through, but the bank reckons it should be back to distributing capital to shareholders “later than Q1 2017“. I see RBS as on the mend and with a good long-term future, but right now I think the shares a still a little overvalued compared to Lloyds on a P/E of nine and with 6% dividend yields on the cards.
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Oil strengthening?
Shares in Tullow Oil (LSE: TLW) are down 85% over five years, to 224p, but since a low on 20 January this year they’ve managed an 83% recovery. That’s closely related to the recovering price of oil, which is up to $42 per barrel from a low of below $30 in mid-January, and any further rise in Tullow Oil shares will surely be dependent on a further strengthening of the black stuff.
But the company did get an extra boost on 16 March, when an update on its Cheptuket-1 well in Kenya reported strong oil flows over an interval or more than 700 metres, with exploration director Angus McCoss calling it “the most significant well result to date in Kenya outside the South Lokichar basin“.
Production from other African assets should ramp up this year too, and while an investment in Tullow would still be risky now, I’m cautiously optimistic.
Bad publicity
Sports Direct International (LSE: SPD) boss Mike Ashley has been in the news for the wrong reasons recently, having been summoned to appear in front of a committee of MPs regarding allegations surrounding the company’s employment practices.
That comes on top of January’s Christmas trading update that reported poor trading — which the company blamed on the unseasonal weather. It led the firm to say it was “no longer confident of meeting our adjusted underlying EBITDA target […] of £420m for the full year“. On the day, the shares lost 15%, and they’ve since fallen to 437p for a 45% drop since the beginning of December.
The company has dropped out of the FTSE 100 now, but I can’t help thinking its fundamentals are starting to look attractive again. After years of double-digit gains, EPS is expected to fall slightly this year. But two subsequent years of modest recovery would drop the P/E to only 9.4 by April 2018, and that just seems too low to me.
Index trackers selling off the shares will have contributed to the fall, but with the price up 9% so far today they might have given us a nice buying opportunity.
