Standard Chartered PLC, Rolls-Royce Holding PLC & Pearson plc: Turnaround Plays Or Value Traps?

Standard Chartered

2016 is looking like it will be another tough year for Standard Chartered (LSE: STAN). Shares in the emerging market focused bank have fallen by 14% since the start of the year, and this fall comes on top of the 41% decline made in 2015. Having fallen by so much already, its shares now trade at just 56% discount to book value, even on a post-rights issue basis.

The bank is undergoing a major restructuring, with plans to cut 15,000 jobs, reduce its risk-weighted assets by almost a third and raise $5.1 billion through a rights issue to shore up its balance sheet. Through slimming down and shedding underperforming assets, the bank aims to become more profitable in the longer run.

But, although this strategy makes sense, this does not mean investors should not expect any quick returns. The transformation could certainly have an impact in the longer term, but in the short term, it does alter much of the current performance of the bank. Its current portfolio of underperforming assets, particularly those troublesome loans made to the commodities sector, would be most difficult to sell in the current environment. And this would only leave the bank to slowly run off those assets from its balance sheet.

Standard Chartered is forecast to have delivered underlying earnings of just 38p per share in 2015, which represents a return on equity of less than 5%. What’s worse, management only expects to reach a return on equity of 8% in almost three years time, by 2018. With the bank expected to deliver a return on equity which is well below the cost of its equity, it only seems fair that the bank should continue to trade a substantial discount to its book value.


The downturn in the energy sector and defence spending have really weighed down on shares in Rolls-Royce (LSE: RR). The company has been forced to announce five profit warnings in little more than two years, and the worst of it does not seem to be over yet.

Tumbling energy prices and the transition to its newer Trent 7000 commercial engine will create further headwinds to the company’s near-term outlook, meaning earnings could still fall further. But on the upside, the engine maker is making significant steps to streamline its management structure and reduce costs. And, the potential in cost reduction is massive, as Rolls-Royce employs more people and has much lower margins than quite a few of its competitors.

Underlying earnings is set to have fallen some 20% in 2015, and analysts expect they will fall by another 43% this year. So, shares in the company trade at a pricey forward P/E of 20.5. However, I do not believe this reflects the long term value of the company. Demand for air travel remains robust, despite the recent turmoil in financial markets, and energy prices will eventually recover. If all these factors come together then it’s certainly possible that shares in the company can recapture its former glory.


Fears surrounding the Pearson‘s (LSE: PSON) growth prospects have hurt investor sentiment and depressed valuation multiples. Currently, Pearson trades at just 12.3 times its expected 2016 earnings, based on analysts’ expectation the company will deliver underlying EPS of 65.9p in 2016. What’s more, its shares have a very attractive prospective dividend yield of 6.9%.

Although the near-term outlook for the company is gloomy, the longer-term outlook is still positive. Enrolment in higher education is non-cyclical and the structural shift from print to digital should lead to a widening of its economic moat. Similar shifts towards digital in media have led to a widening of profit margins and strengthened market leaders, by reducing fragmentation in the market. But only time will tell if the same holds true for Pearson.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.