Category Archives: Portfolio

Lonmin underground mine (copyright Lonmin)

Lonmin plc Q3 update: does this valuation still make sense?

Lonmin underground mine (copyright Lonmin)

Lonmin underground mine (copyright Lonmin)

Disclosure: At the time of publication, I own shares in Lonmin.

Lonmin shares have tripled in value in just seven months.

I’ve become increasingly aware that unlike the other big miners, Lonmin’s share price recovery is not backed by rising profits and substantial balance sheet improvements.

After such rapid gains, I thought it was worth taking a fresh look at the stock following yesterday’s Q3 update. I’m concerned that Lonmin’s financial progress may be slowing.

The company warned that full-year costs are now likely to be between R10,400 and R10,700 per PGM ounce, up from guidance of R10,400 per ounce previously. The rand also appears to be gaining strength relative to the US dollar.

In this article I’ll ask whether Lonmin’s market cap still makes sense. Is the risk/reward balance still favourable for equity investors?

How to value Lonmin?

Profits? Lonmin’s lack of profits makes valuation more difficult. Looking back at the group’s historical performance isn’t hugely helpful either. Between 2010 and 2014, Lonmin generated an average post-tax profit of -$9.4m. During this period, platinum prices were mostly higher than they are today.

The picture that emerges is one of unpredictable profitability driven by platinum prices, the USD/ZAR exchange rate and poor cost control and labour relations.

Book value? How about the value investor’s favourite metric, book value? Lonmin’s last reported book value was about 510p per share. The stock currently trades at a discount of more than 50% to this valuation.

However, as with the UK’s banks, a distinct lack of profits could mean that Lonmin trades below book value for a long time yet. A P/E of 20 — not unreasonable for a recovering cyclical business — would imply a net profit of $95m.

On the same basis, the current share price of about 230p implies a net profit of about $43m. Yet consensus forecasts suggest a loss of $17.9m this year and a profit of just $1.4m next year.

I fear that there’s a big gap between the performance implied by Lonmin’s current valuation and the reality.

PGM prices vs. exchange rates

Lonmin’s profits could rise sharply if the price of platinum continues to recover. This could well happen, as the white metal remains well below levels seen in the past:

IG Index 5yr platinum chart

Platinum prices over the last five years (source: IG)

However, recent gains in platinum — which has risen from $1,009/oz to $1166/oz since the start of July — have not resulted in rising forecasts. In fact, the consensus view has edged slightly lower, with the Reuters consensus forecast loss per share dropping from $0.15 to $0.19 at the start of August.

One reason for this may be the USD/ZAR exchange rate, which now appears to be moving against Lonmin:

IG USD/ZAR price chart

1yr USD/ZAR price chart (source: IG)

Exchange rates are at least as important as PGM prices for Lonmin. Yesterday’s update confirmed this view. Consider these figures, which represents 2016 and 2015:

Average prices $ basket incl. by-product revenue $/oz 796 907
R basket incl. by-product revenue ZAR/oz 11,864 10,861
Exchange rate Average rate for period ZAR/$ 14.99 12.08
Unit costs Cost of production per PGM ounce ZAR/oz 10,596 10,839

Data from Lonmin Q3 2016 Production Report

The USD PGM basket price has fallen by 12% over the last year, while the same basket priced in rand has risen by 9%.

This kind of swing is one of the reasons Lonmin’s historical profits have been so volatile. As a matter of policy, Lonmin’s doesn’t hedge commodity price exposure. Nor does the group have businesses in other countries which act as natural hedges.

Thus long-term survival is dependent on having low cost assets and building up a big cash pile when times are good. I’m not sure Lonmin’s track record of three rights issues since 2009 supports such a confident outlook for equity investors.

What about cash flow?

Ultimately, a business is only viable if it can generate positive cash flow.

Last year’s $407m rights issue left Lonmin with net cash of $69m. At the end of Q3, that figure had risen to $91m, suggesting positive cash flow of $22m so far this year. This figure may have been distorted by working capital and forex movements, so I’ve done my own sums.

Using Lonmin’s published figures from H1 and Q3, I estimate that the firm has generated operating cash flow of around $40m so far this year. After three quarters, Lonmin appears to be some way short of covering this year’s planned capex of $105m — which is the bare minimum necessary to maintain and improve current operations only.

Lonmin expects the fourth quarter to be the strongest, but warned in yesterday’s updates of a number of factors which “have the potential to interfere with production” during this period. These include local government elections and wage negotiations.

My verdict

Lonmin has clearly made a lot of progress since its rights issue. Chief executive Ben Magara appears to be doing a good job of transforming and maximising the potential of the business.

I believe Lonmin does have the potential to become free cash flow positive and profitable. But I can’t avoid the conclusion that this outcome is heavily dependent on unpredictable PGM prices and the USD/ZAR exchange rate. There’s also the risk that costs will creep up again. Lonmin appears to be at the mercy of factors it cannot control to a greater extent than some other miners.

A second concern is that Lonmin’s valuation appears to price in a return to levels of profit that are an order of magnitude above current forecasts. I suspect further share price gains will be as much down to good fortune as good management execution.

On that basis, I’m going to sell my shares in Lonmin.

Update 1/9/16: Perhaps this is another reason to sell.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.


A share tip circled in a newspaper share listing

Barclays plc H1 results: mixed news, but I’m holding

A share tip circled in a newspaper share listingDisclosure: I own shares of Barclays.

Today’s interim results from value portfolio stock Barclays plc (LON:BARC) came in ahead of analysts’ expectations, hence the 6% rally in the bank’s stock.

Notwithstanding this, group pre-tax profit was down 20.7% to £2,063m. Group return on average tangible equity fell from 6.9% to 4.8%.

One bright spot was that Barclays’ CET1 ratio has risen from 11.4% to 11.6% so far this year.

For value investors, a further highlight was that tangible net assets per share increased to 289p during the first half, up from 275p at the end of 2015. Barclays’ continued actions to dispose of non-core assets, including the initial 12% placing of Barclays Africa, seem to be having a positive effect on the balance sheet. Even after today’s gains, the stock trades at a 45% discount to NTAV.

The problem — or at least the risk — is that Barclays still appears to have a mountain to climb. This is best expressed by the contrast between the profits from the bank’s core divisions and the losses from its non-core division:

  • Core pre-tax profit 1H16: £3,967m (1H15: £3,347m)
  • Non-core pre-tax loss 1H16: £1,904m (1H15: £745m)

There appears to be a profitable bank waiting to escape from a whole load of loss-making dross. The question is whether Barclays can dispose of its non-core assets quickly and cheaply enough.

A second question is whether the bank’s profit margins can survive further cuts to interest rates, as now seem possible in the UK. CEO Jes Staley said today that while a base rate cut to 0.25% would have little impact on margins, a drop to 0% could be more “significant”.

What next?

Banks have already taken longer than expected to recover. Today’s results suggest progress is being made but make it clear that there’s still much further to go. From my relatively non-expert viewpoint, the macroeconomic context doesn’t seem likely to accelerate Barclays’ recovery.

However, the bank’s balance sheet is improving and a capital raise appears unlikely. Mr Staley has already cut the dividend in half. My view is that the stock’s discount to net asset value should provide some downside protection, as long as the profitability of Barclays’ flagship UK banking and Barclaycard operations isn’t called into question.

One final thought is that on a two-year view, the chart below suggests to me that Barclays shares might be due a rebound — note the improving RSI and Momentum readings:

Barclays share price chart

Barclays share price chart July 2016 (courtesy of Stockopedia)

For now, I continue to hold.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

A tunnel in a deep mine

Anglo American plc: good news on debt reduction outweighs concerns

A tunnel in a deep mineDisclosure: I own shares of Anglo American and BHP Billiton.

Portfolio holding Anglo American plc (LON:AAL) issued its interim results this morning.

The firm’s shares had already tripled in value from January’s low, but this didn’t stop the stock from printing further gains when the market opened.

Debt on track

The big news was that Anglo expects to hit its $10bn net debt target this year, without needing to make any further divestments.

According to chief executive Mark Cutifani, the only dependency is that the asset sales already announced this year — principally the $1.5bn sale of Anglo’s niobium and phosphate assets — complete on schedule.

The group is thought to be negotiating a possible sale of its Australian coal assets to BHP Billiton, but there was no news on further asset sales today.

Mixed performance

The group’s financial performance during the first half was more mixed. Underlying EBIT (operating profit) fell by 27% to $1.4bn, due to lower commodity prices.

However, costs are falling. Copper equivalent unit costs fell by 19% versus the first half of 2016, and Anglo has now locked in $0.3bn of this year’s planned $1.6bn of cost savings and volume improvements. Anglo’s pre-tax loss shrunk from $1,920m last year to just $364m.

Attributable free cash flow of $1.1bn was a big improvement on $0.2bn for the same period in 2015. Attributable ROCE remained unchanged at 8%.

Which earnings are real?

Earnings per share for the six months to 30 June 2016 were ($0.63), $0.34 or $0.54, depending on which version of Anglo’s earnings you choose to believe!

Here’s a quick summary of what each version of profit represents:

  • Statutory or reported earnings per share = ($0.63) — this includes all exceptional costs and one-off items, including non-cash impairments and gains. This is the version of profit required by IFRS accounting standards, as used by UK plcs. Anglo’s decision to apply a $1,248m non-cash impairment charge to its coal assets made it certain that H1 reported profits would be negative, but in cash terms the group’s mining business was profitable.
  • Headline earnings per share = $0.34 — headline earnings is a performance measure defined by the Johannesburg Stock Exchange, on which Anglo also has a listing. Based on this document on the JSE website, the purpose of headline earnings appears to be provide a more accurate view of operating profits, excluding the one-off losses and gains that result from revaluing an asset. This is particularly pertinent to mining and energy companies, who tend to revalue assets upwards and downwards as commodity market conditions change. These non-cash charges don’t generally affect operating performance. I’d suggest that this headline earnings figure is the most realistic measure of Anglo’s H1 trading performance. It also seems to correlate best with current consensus forecasts for earnings of $0.50 per share in 2016.
  • Underlying earnings per share = $0.54 — in addition to headline earnings, Anglo also provides its own underlying earnings per share figure. Based on note 10 to the H1 accounts, this is a more generously adjusted figure than headline earnings. Costs which do not qualify for exclusion from headline earnings are excluded from underlying earnings. I’m not certain, but the disparity between H1 underlying earnings of $0.54 per share and consensus forecasts for FY adjusted earnings of $0.50 per share suggest to me that analysts’ view on what constitutes a reasonable adjustment to earnings may not be as generous as that of Anglo’s management.

While I don’t tend to rely on consensus earnings for valuation, the momentum implied by a continue trend of forecast upgrades or downgrades can be a useful indicator of likely performance.

Consensus forecasts for Anglo’s 2016 earnings have now risen from a low of $0.16 per share in January to $0.50 per share. I take this as a positive sign.

My view

Today’s results were slightly better than I expected and suggest Anglo American’s turnaround is proceeding to plan. The stock looks cheap relative to historic profit levels and remains at a 15% discount to tangible net asset value.

While future profits may not match historic highs, I’m fairly confident that there is more upside to come.

I continue to hold.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

A share tip circled in a newspaper share listing

Restructuring pays dividends for Fenner in tough markets

Disclosure: I own shares of Fenner.

Today’s third-quarter update from portfolio stock Fenner (FENR.L) was reassuring. The group said that trading was in line with expectations and that cost-cutting and restructuring were delivering the expected results.

The group’s medical business “is continuing to perform well” while efficiency measures and market share gains in the oil/gas and mining sectors are helping to improve results. A more stable outlook for the US oil and gas sector is expected to deliver profit gains in the new financial year (Fenner has a 31 August year end).

The update also touched on the referendum. As much of the firm’s revenue is in US dollars, sterling weakness will cause reported EBITDA and reported net debt to rise this year. The effect on Fenner’s net debt: EBITDA ratio (a key lending covenant) is expected to be fairly neutral and the company emphasised that this is a currency translation issue only. On a constant currency basis, net debt will be in line with expectations.

The overall outlook remains cautiously optimistic and full-year results are expected to be in line with expectations. Although the shares now look fully priced relative to current forecasts, I think that the outlook is improving for next year and that further earnings upgrades are possible.

I remain happy to hold as the recovery continues.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

CCTV security camera

Indigovision stays on hold after net cash increase

CCTV security cameraDisclosure: I own shares of Indigovision Group.

Last week’s trading update from Indigivision Group (IND.L) was broadly reassuring, albeit it revealed that like so many tech pioneers, the group is suffering from cheaper competition.

But the big news was that net cash increased to $4.6m at the end of June, up from $2.7m at the end of last year. This is presumably the result of falling inventories and/or improved working capital management. The increased cash balance means that about a third of Indigovision’s £10m market cap is covered by net cash.

Trading appears to be improving, with most of last year’s first-half loss having been eradicated, according to the firm. A full-year profit is forecast by the firm’s house broker, which is guiding for adjusted earnings of $0.24 per share this year. That’s equivalen to a forecast P/E of less than 7.

Given the discount to book value and strong balance sheet, I think the near-term downside risk is limited. I continue to hold.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Scales of justice

Why I’ve sold my Laura Ashley shares

Disclosure: I do not own shares in any company mentioned in this article.

I sold my Laura Ashley (ALY.L) shares last week for a loss of about 20%, after costs and dividends.

While I don’t think there’s anything wrong with the business, I’ve become unsure about the outlook for retailers. I also wanted to free up some cash for a new opportunity I’m researching.

Retail outlook uncertain?

Last week’s surprise profit warning from Portmeirion — a luxury home and tableware firm — was discouraging. Portmeirion reported an unexpected downturn in sales in Asia and said the UK market was lacklustre.

Closer to home, John Lewis is also said to have seen a slowdown in sales growth since the referendum. A number of retailers have issued disappointing results recently, and earnings visibility seems poor.

Laura Ashley’s growth hopes are pinned on Asia, while the group depends on a robust UK performance for the majority of its profit and turnover. I’m concerned there may be some read across.

Could the dividend come under pressure?

Laura Ashley’s big attraction is its strong free cash flow and massive dividend yield — 9% at present. But dividend cover is only about 1.2, so if earnings fall this payout could come under pressure.

Since the group took out a mortgage on its new Asian HQ in Singapore, it no longer has a large net cash balance to fall back on.

No visibility

Another reason for my decision was that we know so little about Laura Ashley’s recent trading. The firm’s relaxed reporting schedule and the change to its accounting reference dates mean that the latest figures available only cover until 30 January 2016.

The new year-end is 30 June and results are due by the end of August. But the firm hasn’t put out a trading statement in the interim. March’s second interim results did include a short statement on current trading, but it wasn’t very detailed. I’ve reproduced it here in its entirety:

Trading for the seven weeks to 20 March is down 0.4% on a like-for-like basis.

I could be wrong

I’d like a bit more visibility in such uncertain conditions. That’s one of the reasons I sold. But I could be wrong. I certainly don’t rate Laura Ashley as a strong sell.

We’ll find out whether I was right or wrong to ditch my shares next month, when Laura Ashley publishes accounts for the period from January – June.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

A share tip circled in a newspaper share listing

Hargreaves Services update confirms underlying value

A share tip circled in a newspaper share listingDisclosure: I own shares of Hargreaves Services.

Results update 11/08/2016: Following this week’s full-year results, my views below haven’t changed. Nor have the numbers, at least not significantly. The group’s current valuation is broadly in line with the potential of its continuing businesses, in my opinion. In addition to this, there’s the potential (we are told) to realise £60m from legacy assets and £35-50m from property and energy projects.

The main risk is that management is unable to realise this value in the way it expects. At this stage it’s too soon to say. All we have to go on is the group’s track record, which I think is good. CEO Gordon Banham has been bold and decisive in restructuring the group, which has emerged with a sound balance sheet and remains profitable on an underlying basis.

I rate Mr Banham and highly and am also encouraged by his 7.1% stake in the firm, which he took public in 2005 following a management buyout. Banham’s interests should be well-aligned with those of shareholders. But it is possible that he’s out of his depth or wearing rose-tinted classes. Only time will tell.

For now, I continue to hold.

Update 05/07/2016: Yesterday’s post-close trading update confirmed that results for the year ending 31 May are expected to be in line with expectations.

Hargreaves sees a reasonably good chance of recovering the full value of the Tower Colliery loan. The firm may also benefit from the weaker pound post-Brexit when liquidating its dollar-denominated stocks of coke and coal.

There is a risk that a construction slowdown could hit the firm, but management believes the risks are evenly weighted against potential gains from public sector projects.

My stance remains buy and the arguments set out in my piece from April below remain valid, in my view.


Yesterday’s update from Hargreaves Services (LON:HSP) triggered a surge of buying that lifted the shares nearly 10% and resulted in twelve times the normal number of shares changing hands.

So what triggered this burst of enthusiasm for a stock that’s been comprehensively out of favour?

The firm published a strategic update which confirmed the underlying value in the shares that I discussed following the firm’s interim results. You can read the full update here and see the presentation here, but I’ve summarised the main highlights below:

  • Core business: Hargreaves is going to bring forwards the closure of the majority of its mining business. The group will focus on core businesses of coal distribution, industrial services, transport and earthworks/infrastructure going forwards. The board’s view is that these should be able to generate an annual operating profit of £10-£15m in the medium term.Taking the mid-point of this estimate and assuming tax and further deductions of about 30% implies post-tax profits of £8.75m. That’s equates to a P/E of around 7 at the current £55m market cap. That seems about right.
  • Property & Energy: The firm has 18,500 acres of land in the UK. Work is underway on a number of housing and energy projects. The energy projects are listed as energy from waste, onshore wind, exploiting existing grid connections and solar.The board is targeting £35-£50m of “incremental value” from property and energy over the medium term. That’s considerably more than I estimated previously and on a conservative estimate represents half to two-thirds of the current market cap.
  • Realising value from legacy assets: Hargreaves still has considerable stocks of coke and coal plus surplus plant and equipment which is believes have a net realisable value of £66m. — that’s more than the current market cap.

    There is some uncertainty about this amount due to the potential for writedowns on the firm’s loans to the Tower Colliery joint venture. But Hargreaves plans to liquidate these surplus assets by the end of May 2017. The firm does have a good track record of generating cash from surplus and legacy assets, so I’m reasonably confident this will be handled well.
  • Net assets of £140m: Hargreaves’ update yesterday said that the group’s net assets at the end of March were £140m, comprising £52m (core trading), £22m (energy/property) and £66m (releasing value from surplus assets and inventories).

In my view, the current market cap is about right for the firm’s ongoing business. On top of this Hargreaves’ property portfolio and surplus assets have the potential to generate perhaps £80-£100m of one-off gains over the medium term.

My mistake with this investment was to buy too soon. But based on yesterday’s update I’m happy that I decided to average down and intend to continue holding. I believe there could be substantial upside from the current price of 170p.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Fifty pound note

Sales wobble but Laura Ashley delivers cash for patient shareholders

Fifty pound noteDisclosure: I own shares of Laura Ashley.

Laura Ashley delivered a second interim set of results today, covering the last 52 weeks.

These are effectively annual results, but because the group has changed its year-end date from 31 Jan to 30 Jun this year’s final results will actually cover 17 months.

This firm is a portfolio holding of mine, so I was very interested in today’s results.

Quick view: Profits were down slightly, but like-for-like sales in the core UK retail division were up. Overall my impression was that the 8% dividend yield remains safe and continues to be backed by free cash flow.

After an initial wobble this morning, it appears the market agreed with my view. The shares closed up slightly a few minutes ago. I continue to hold.

In more detail

Pre-tax profits before exceptional items were £20.7m for the 52-week period, down from £22.9m for the 53-week period last year. The decline was partly due to having one fewer week and partly the result of poor trading in the firm’s franchised international division — mainly in Japan.

Laura Ashley’s UK chain of retail shops performed well, and like-for-like sales rose by 4.8%.

There was a welcome 3.1% reduction in operating expenses.

For me, Laura Ashley’s appeal likes in its strong free cash flow and similarly strong balance sheet. These appear to remain intact. The cash flow statement requires careful reading as the dividend is included in the operating cash flow section, which confuses most online data services (dividend payments are normally listed in the financing section of the cash flow statement):

Laura Ashley cash flow stmt

However, said careful reading shows that operating cash flow was £25.1m over the last 52 weeks. Of this, £19.2m was free cash flow (excluding the purchase of the group’s new Asian HQ building in Singapore). From this free cash flow, £14.5m was paid to shareholders as dividends.

Today’s results confirmed another 1p interim dividend which takes the payout for the last year to 2p per share. That’s an 8% yield, backed by free cash flow. What’s not to like?

The balance sheet also remains strong, with £17.1m in cash. There’s no debt except for the £19.7m mortgage on the aforementioned Singapore office block. This purchase continues to divide investors, and does seem strange.

Despite this, I see no reason to suspect any foul play. Singapore isn’t China — the building exists and is located in a regular commercial district. Laura Ashley will no doubt let out any parts of the building which aren’t required for its Asian headquarters.

Final word: Laura Ashley had a fairly unexceptional year, but the firm’s finances remain healthy. I believe that there is potential for further expansion in Asia. This will be done through the firm’s wholesale/franchise model, meaning that the risk to shareholders should be low.

I continue to hold.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

CCTV security camera

Why I’ve bought more shares in IndigoVision

Disclosure: I own shares of IndigoVision Group.

CCTV security cameraVideo security system specialist IndigoVision Group released its 2015 results today.

IndigoVision shares have fallen by 25% since my original purchase, thanks to the firm reporting a first-half operating loss. There was then a second profit warning in December, due to the H2 upturn being smaller than had been originally hoped for.

You can see the numbers I used to back my original purchase in this post. Reading back, I’m still comfortable with the decision, albeit I bought too early (as usual). Today’s results have done nothing to dent my confidence that some kind of recovery is likely. IndigoVision has cut costs and returned to profit in H2. The firm also announced a surprise 2.5p final dividend.

IndigoVision’s balance sheet also remains very strong. The group ended the year with net cash of $2.76m and no debt. Despite this strength and an improving outlook, the stock now trades below book value. That’s why I decided to buy more shares today.

Deep value?

I’m becoming increasingly interested in balance sheets and perhaps cash flow only to value compoanies. This ties in nicely with traditional deep value investing techniques, as epitomised by Ben Grahama’s net-net approach.

After looking at IndigoVision’s results today and assuring myself that the company still appears to have a competitive product in a healthy marketplace, I turned to the balance sheet. How much is IndigoVision worth?

Two possible measures are the net tangible asset value (NTAV) and the net-net working capital, Ben Graham’s preferred measure. This is calculated by subtracting total liabilities from current assets. Fixed assets, which are generally very illiquid, are ignored.

It’s very hard to find quality companies that trade below their net-net value, but it can be interesting when you do. Here’s how IndigoVision’s numbers stack up (figures as of 3 March 2016):

  • Share price: 172p
  • NTAV: 217p per share
  • Net-net working capital: 159p

IndigoVision now reports in USD, so I’ve used today’s exchange rate of $0.71:£1.

Small-cap expert Paul Scott rightly points out that the deferred tax asset of $4.9m should perhaps also be ignored. On this basis, NTAV works out at 172p — the current share price. IndigoVision isn’t quite a net-net stock, but it’s not far off.

All in all, IndigoVision’s current valuation appears to attach very little value to the firm’s current and future business. This seems a bit harsh to me. I’ve averaged down and continue to hold.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

A share tip circled in a newspaper share listing

Should I buy, hold or sell Barclays & Standard Chartered after 2015 results?

A share tip circled in a newspaper share listingDisclosure: I own shares of Barclays and Standard Chartered.

It’s been a dismal results season for shareholders in most of the UK’s big banks, which seem more like value traps than value buys.

But that’s enough sour grapes. Two of these upstanding corporate citizens — Barclays and Standard Chartered — feature in my value portfolio. Should I hold on for better days, or is the downside risk big enough to make selling a more prudent option?

As I’ve commented before, there’s no real way for a private investor to gain a meaningful understanding of a big bank’s balance sheet. We’re completely reliant on the information provided by the banks themselves in their results. Typically there is quite a lot of this, much of which is also fairly inpenetrable.

Because of this, I tend to focus on a few key factors which I believe could make or break banks’ recoveries. On this basis, let’s take a closer look at each bank’s results.

Standard Chartered

With Standard Chartered, the defining issue — in my view — is bad debt. In 2015, underlying loan impairments rose by 87% to $4.0bn. This excludes a further $968m impairment relating to the $20bn portfolio of risk-weighted assets which StanChart is currently trying to liquidate.

To give these numbers more meaning it helps to compare them to the bank’s total loan book. StanChart’s total impairment (as reported) of $4,319m represents 1.43% of its loan book. That’s a 100% increase from 0.72% in 2014.

While the percentage is currently low, the trend is clearly alarming. The majority of this additional impairment appears to relate to loans to commodities and to clients in India. The outlook appears uncertain, but I think you’d have to be pretty optimistic to believe things couldn’t get any worse.

Consensus earnings forecasts for Standard Chartered have fallen by 54% over the last three months. Net profit for 2016 is now expected to be just $676m. This year could be pretty bad and I wouldn’t be surprised if the bank reports another loss. However, bad debt problems will eventually moderate, and I don’t believe Standard Chartered’s business model is broken.

On a 2-3 year timescale, I believe a recovery is more likely than not. I’m holding for now.


What a disappointment. The dividend hike we’ve been looking forward to for the last year has been scrapped. New boss Jes Staley will honour the 6.5p expected for 2015 but has slashed the payout to 3p for the next two years.

My big concern at Barclays is not bad debt, nor the misconduct charges bemoaned by chairman John McFarlane. These problems will eventually subside, in my view. The risk here seems to be that the bank just isn’t profitable enough to generate decent shareholder returns.

On this basis, the bank’s plans to sell its Africa business and focus on building a transatlantic corporate, retail and investment bank makes sense. While the Africa business is profitable and should be a long-term growth story, it’s not a close fit with the rest of the bank and is weighing on Barclays capital ratios.

The dividend cut makes sense too. Barclays needs to solve its problems and strengthen its balance sheet as quickly as possible. Saving more than $1bn over two years by halving the dividend is a sensible move. It should pay for some of the bank’s cash restructuring costs.

I’m holding.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.