Should investors call the bottom and buy Standard Chartered (LSE: STAN), Royal Dutch Shell (LSE: RDSB) and Fenner (LSE: FENR) — or could there be worse to come?
Standard Chartered
Shares in emerging markets bank Standard Chartered open lower today, as the shares went ‘ex-rights’. This means that Standard’s shares now trade without the right to participate in the forthcoming 2-for-7 rights issue through which the bank will raise £3.3bn of fresh capital.
The fact that Standard Chartered has been forced into a rights issue proves that the bank has problems. But now could also be a good time to buy. As a shareholder I, will be taking up my rights and buying some new shares.
I’m not expecting a miraculous recovery to 1,000p+ in the near future, but I do think that the bank’s core business remains appealing and will recover. Standard Chartered shares now trade at a discount of around 50% to their book value, reflecting market concerns that the group’s bad debt problems could get worse.
I do expect further write downs following the $1.2bn impairment announced in the third quarter, but believe Standard Chartered shares offer decent long-term value at less than 600p. Earnings per share are expected to rise by about 40% next year, giving a 2016 forecast P/E of 10. There’s also a forecast yield of 3.5%.
Shell
Shell’s planned acquisition of BG Group continues to make progress. The firm has now received all but two of the regulatory approvals it needs. However, Shell does still face two big challenges, in my opinion.
Firstly, the deal needs to gain regulatory approval from China’s Ministry of Commerce. Secondly, Shell needs to prove that the deal will work with sub-$70 oil.
Personally, I think the deal will be a long-term success, if not a short-term winner. If the deal goes ahead, Shell will sell non-core assets from BG’s and its own portfolios, and should benefit from significant economies of scale.
The decision to focus on a smaller number of high quality assets makes sense to me. Shell shares currently trade on a price/book ratio of 1 and a forecast P/E of about 13. The firm’s current dividend of $1.88 gives a 7.5% yield. Shell has promised to maintain this payment for at least another year. I recently topped up my holding and believe the shares remain a buy.
Fenner
Fenner’s recent full-year results triggered a further slide in the firm’s share price. The cause of this wasn’t last year’s results, which were as expected, but the outlook for the year ahead.
The prolonged downturn in the mining market, in particular the US coal sector, is causing serious problems for Fenner’s Engineered Conveyor Solutions business. Further cuts will be needed here, but the group’s other division, Advanced Engineering Products, has a much more diverse customer base and trading is fairly stable.
The market is pricing in a 25% dividend cut this year, but even so the shares offer a prospective yield of 5.8% at 150p. My calculations also suggest that Fenner’s PE10 — the price divided by 10-year average earnings — has now fallen to around 9.
Value pioneer Ben Graham often used the PE10 to identify out-of-favour stocks that looked cheap, and I believe Fenner may be worth a closer look in this regards.
