RBS has flown out of the traps on the first trading session of 2010:
Aside from a rumour that Brazil’s Unibanco is, for reasons that escape us, interested in buying a stake in RBS (and also Lloyds), the reason seems (to some) to be an example of new year contrarian thinking; Because RBS was the worst performing stock in the FTSE 100 last year (down 40 per cent), it follows that it might bounce back this year.
That certainly seems to be the thinking of the banking team at Exane BNP Paribas, who are pushing RBS on Monday morning:
We recognise that, for many investors, RBS had become a “stock to avoid” almost irrespective of price. In the Summer of 2009 it also became remarkably expensive! However, with the halving of the share price over the past four months and an expectation that, over the next few quarters, some early progress in terms of asset disposals will be achieved, and with greater certainty around macro developments, we expect fundamental (rather than purely speculative) investor interest to return in 2010.
We conclude that the risk/reward balance has finally moved far enough to turn outright positive on RBS. It is a stock with few obvious near-term catalysts, unlikely to deliver positive EPS until 2012, and unable to pay a dividend before 2012 (at the earliest). However, the fact that it now trades on just 0.6x 2011e tNAV – and we expect 2011 to be the trough year – makes it, in our view, a fundamentally attractive valuation play.
Of course, anyone who bought the FTSE 100 dogs of 2008 had a good 2009 — a basket of the 10 laggards would have delivered a return of 100 per cent.
However, as this (slightly dated) table from Citigroup shows, RBS and Lloyds did not deliver in spite of a poor performance in 2008:
Anyway the BNP team, led by Ian Gordon, are not getting too carried away; They have only set a 40p price target for RBS and say a lot could go wrong.
Such as:
Although RBS has agreed to a number of business disposals over a four-year period to comply with EC State Aid requirements, the timing and realisable value of such disposals are uncertain. Similar uncertainties surround the disposal/run-off programme of many of the assets/businesses within RBS’s non-core division. We are, de facto, placing a high degree of confidence in RBS’s new management team to successfully execute a very extensive and challenging programme of restructuring and divestment. If our confidence in that management team is misplaced, or if external events curb management’s ability to execute in an orderly or commercial manner, our forecasts may be adversely affected.
And
Although the UK government’s 84.4% interest in RBS is notionally managed at arms length through UKFI, RBS remains subject to exceptional political scrutiny. This has the potential to further impair its ability to act commercially to attract and maintain key staff (notably within its Global Banking & Markets division) and could lead to the adoption of sub-optimal strategies in other areas of its business.
Contrarians beware.
Related link:
The dogs of the FTSE 100 in 2009 – FT Alphaville