RBS
Royal Bank of Scotland Group (LSE: RBS) reported a surprise boost in profitability for the second quarter of 2015. Net profit in the three months leading to 30 June 2015 was £293 million, which represents a 27% increase on the same period last year.
On a more downbeat note, adjusted operating profit fell 7% on the same period last year, to £1.81 billion, following the scaling back of its investment bank. Restructuring costs more than doubled on the preceding quarter to £1.05 billion, as the bank’s restructuring plan accelerated. In a bid to return to improve profitability, the bank has identified that it needs to shrink its investment bank further and dispose more non-core assets. Today’s quarterly earnings update shows RBS is far from completing its restructuring plan. There is also much uncertainty about the size of the impending regulatory penalties for the bank’s legacy issues.
Shares in RBS initially rose 4.7% to a high of 370.0 pence, before falling back to 354.8 pence (+0.5%) by morning trading.
Babcock disappoints
Continued softness in the defence sector sent shares in Babcock International Group (LSE: BAB) to fall 3.7% to 1000 pence by morning trading. But today’s update showed the company is on track to deliver growth in both revenue and earnings per share. Babcock’s order book remains stable at £20 billion, with 84% of revenue for the current financial year already reserved.
Babcock has been able to offset the weakness in the defence sector with growth from its support service division, which includes the decommissioning of nuclear power plants, rail network engineering and education support services. As underlying revenue and earnings growth trends remain intact, shares in Babcock are worth buying on recent weakness. Its forward P/E is just 13.9.
Takeover bid for Chime Communications
Today, Chime Communications (LSE: CHW) confirmed market rumours that it could face a takeover from a consortium that includes Providence Equity Partners LLC and WPP. Shareholders in Chime could receive a potential cash offer of 365 pence per share, and continue to receive an interim dividend for the current year of 2.53 pence per share.
Shares in Chime rose 26.3% to 346.8 pence by mid-morning trading. Chime’s board said “there can no be certainty that the Consortium will proceed to make an offer for Chime”. But, today’s share price reaction suggests the market expects a deal is very likely. WPP, which already owns 20% of Chime , is keen to bolster its presence in the sports marketing industry with the proposed takeover.
Although the WPP consortium is paying a hefty premium on Chime Communication’s recent share price, its offer may not fully reflect the company’s long term growth prospects. The delay of two major contracts have temporarily stunned the company’s recent revenue growth, causing the recent weakness in its share price. But with a growing client list and the 2016 Olympic Games getting closer, Chime could soon return to deliver strong double-digit earnings growth. At 365 pence per share, Chime is valued at just 13.8 times its projected 2016 earnings.
