A right Royal flotation
The recent flotation of Royal Mail (LSE: RMG) may have been politically controversial, dramatically under-priced and a rotten deal for the taxpayer, but it was great news for investors.
The share was priced at £3.30. At time of writing, it trades at £5.33. Lucky investors have made a 62% profit so far, and that’s before the first dividend rolls in. The bad news is that most were only granted a measly £750 of stock. The good news is that is now worth more than £1,200.
The investor feeding frenzy suggests there is a real public appetite for privatisation stocks, which is good news for Chancellor George Osborne, who will be keen to push through a privatisation of Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) before the May 2015 election. There will doubtless be massive interest in any sell-off, political as well as financial, as we discover whether the British taxpayer is finally going to make a profit on its investment. Unlike the Royal Mail, however, it won’t be a one-way bet.
Good for bad
Chancellor George Osborne has yet to decide whether to split RBS into a good bank and bad bank, sell off a slimmed-down operation, or simply dish out shares to the general public. A smaller, cleaner RBS could be worth 540p per share, UBS says, well above the state’s break-even point of 500p, and today’s price of 365p. We don’t even know if Osborne will test the water with an institutional offering, before taking the plunge with a retail offer, or whether that May 2015 deadline is just too tight. These are political decisions, as much as financial ones.
The spectre of a wedge of RBS shares hitting the stock market has been weighing on the price. The taxpayer currently owns 81% of RBS, so massive dilution is inevitable, although it may largely be priced in. As we have seen recently, any sell-off is also likely to trigger plenty of excitement, which could actually drive up the share price upwards from today’s levels.
RBS is a tarnished brand, but it did recently post a £1.4 billion profit for the first half of the year, up from a £1.7 billion loss in the same period last year. Interestingly, this echoes Royal Mail, which was losing money, until shortly before privatisation. Much hard work has gone into boosting the RBS balance sheet, exiting high-risk trading activities, dumping toxic assets and managing other legacy issues. Profit at the core part of RBS fell, however, due to a 61% slump in its investment bank and 7% fall in profits at its UK retail bank. This is still a risky stock to hold.
Toxic twin
The big problem with RBS is that you don’t know what you are buying. It remains a speculative investment, if a successful one lately, up 20% in the last six months. I suspect public interest in any flotation will be strong, especially if they were only buying into a ‘good’ bank, which means it will do much less damage to the current share price than many think. And if RBS is liberated from its toxic troubles, then future growth should be baked in.
