Standard Chartered (LSE: STAN) and Royal Dutch Shell (LSE: RDSB) have severely lagged the FTSE 100 over the past 12 months.
Indeed, excluding dividends, Standard has lagged the index by 17% over the past year while Shell has underperformed by 25%.
However, after these dismal performances, both Standard and Shell look to be some of the most undervalued companies around.
Merger worries
Shell’s performance has been held back by two key factors during the past year. Firstly, the company has suffered as the price of oil has declined.
Shell’s first-quarter profit plunged 56% to $3.2bn as falling crude oil prices took their toll on the group.
And the second factor that’s held Shell back is the company’s £55bn offer for BG Group.
It seems that investors are concerned that Shell is overpaying for BG. The deal hinges on the price of oil. If oil prices recover to $100 per barrel, then the deal’s figures stack up.
Although, if the price of oil continues to languish, the deal could end up coming back to haunt Shell for years to come.
Not all bad news
As a contrarian play, Shell looks to be a great bet at present levels. The shares currently support a dividend yield of 6.5%, and this payout appears safe for the foreseeable future.
What’s more, even though Shell is paying a hefty premium for BG, analysts believe that asset sales will help the company reduce debt over the long term. Shell is targeting over $30bn of divestments from its legacy business to fund both stock buybacks and debt repayments.
Over the long term, Shell should recover and — after acquiring BG — the company’s oil & gas production, as well as cash flow, will jump giving enlarged group room to reshape its business.
Plenty of warnings
Standard’s shares have slumped over the past year following a series of profit warnings and a scrape with regulators.
Nevertheless, the group is now trying to rebuild its reputation and is in the process of conducting a strategic review.
Analysts believe that Standard will restructure its business and conduct a rights issue to raise more capital within the next six months. These actions should re-ignite growth.
The bank’s new CEO, Bill Winters, who arrived in May, believes that the bank is ripe for simplification and streamlining. For example, Winters is already planning to break Standard’s organisational structure down into regional hubs, similar to a model already used by HSBC.
Standard is looking to concentrate its capital and liquidity in regional hubs, rather than from one centralised base in London. Not only will this reduce organisational costs but it’ll also allow the bank to maintain a more constructive dialogue with regional regulators.
Return to growth
After a year of consolidation, City analysts expect Standard to return to growth next year.
Earnings per share growth of 15% is pencilled in for 2016. Based on these forecasts, the bank is currently trading at a forward P/E of 10.2, around half the banks sector average of 21.4.
Standard currently supports a dividend yield of 4.6%.
