The recent disposal of a stake in Royal Bank of Scotland (LSE: RBS) by the UK government is likely to be followed by additional divestments at a significant loss, at least over the short term — but is it time to sell or to buy the shares of RBS for long-term investors?
Its stock price is down 15% over the last six months, which is roughly the amount of value that the shares of ASOS (LSE: ASC) have lost since mid-July. You may well wonder why I am going to discuss the prospects of ASOS in this article.
Well, a direct correlation between the government and the online retailer is hard to determine, but there are signs that e-commerce platforms could face a tax crackdown.
Stock Sale
The government launched the privatisation of Lloyds on 16 September 2013: a lengthy process had to be expected without the intervention of trade buyers.
About 6% of the shares in the retail banking group were initially sold, reducing the government’s stake to 32.7% from 38.7%. Since mid-September 2013, the shares of Lloyds have gained only 3% of value, and it may take another year or so to cut the Treasury’s stake down to zero.
It’ll likely take between three and six years to exit RBS, unless the Treasury finds a trade buyer willing to take a large equity position in the bank. The government just got rid of a 5.4% stake at 330p a share, selling RBS stock at almost 175p below the required break-even threshold, but it still holds a 73% stake.
A significant discount will apply in every future sale — that’s necessary to attract new investors — and that’s why I’d avoid RBS. Although the bank clearly has more restructuring potential, a smaller assets base and operational improvements will unlikely contribute to value creation while offsetting prolonged downward pressure on its stock price, in my view.
ASOS & Regulations: Nothing To Worry About?
According to recent press reports, the government plans to obtain more data on internet transactions.
“HM Revenue and Customs wants to collect information from internet companies such as Paypal that would allow it to identify British users who have an income from online sales,” The Independent reported on 25 July.
Now, ASOS is not Paypal, of course, and this may be an issue for its customers rather than for ASOS itself, but regulations in the online shopping arena remain a grey area, and could involve millions of daily transactions.
Virtually nobody is paying much attention to the possible impact of tougher regulations, and surely regulatory risk is not behind the recent fall in ASOS shares, but a few legitimate questions remain.
Will this kind of risk be a serious threat to shareholder value in future?
Well, it might affect volumes in the broader online industry, as the ultimate user will likely have to face a higher tax burden in some circumstances. Internet penetration is the UK is incredibly high compared to Western and Eastern standards, and ASOS generates almost 40% of revenues domestically.
The retailer has historically invested in such websites such as Covetique, which targeted the luxury resale market before shutting up shop earlier this summer. More such deals will likely ensue, but will they require greater scrutiny?
ASOS stock is currently priced at around 3,200p, which implies stellar forward multiples based on earnings and cash flows. As you might know, in order to support a rich valuation, ASOS must grow annual revenues at 20% or more, while maintaining an operating margin of 4%.
