Why so cheap today?
RBS (LSE: RBS) (NYSE: RBS.US) made horrific losses in the financial crisis. This forced the government to step in and rescue the bank. Investors today are deterred by the memory of those losses and concerns over government interference. The result is that RBS shares are cheap.
Prospects
That doesn’t seem fair, given prospects for the business. Recent announcements from RBS have confirmed big impairment declines (losses on loans and asset values). RBS has also achieved considerable reductions in the size of its non-core portfolio — frequently referred to as the ‘bad bank’ part of RBS.
The result is increased profits and lower risk to shareholders.
There is evidence that the market is becoming more confident in RBS. In the last month, the shares are up 20%, hugely outperforming Lloyds, Barclays and the FTSE 100.
Valuation
According to the consensus of analyst forecasts, RBS will report earnings per share (EPS) of 21.7p for 2013. This is then expected to rise 46% in 2014, hitting 31.8p. That puts the shares on a 2013 P/E of 15.5, falling to just 10.6 for the year after. That’s a discount of around 35% to the average FTSE 100 share.
With their last results, RBS reported that tangible net assets per share had increased by 3% to 459p. RBS trades today at a 35% discount to this figure.
Unfortunately, there is currently no dividend from the bank.
Verdict
There is a clear case for shares in RBS to be priced significantly higher than they are today. Given that the bank is now profitable, such a large discount to tangible net asset value is hard to justify. If RBS can convince the market of its ongoing profitability and security, I expect the shares to rise significantly. I forecast that the shares will be priced at around 400p by the end of the year — an 18% increase on today’s price. Good news next week on impairments and asset sales at the bank could see me increase my target price further.
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> David owns shares in RBS and Barclays but none of the other companies mentioned.
