Why Royal Bank of Scotland Group plc is a growth bargain I’d buy today

Royal Bank of Scotland Group plc (LON:RBS) could surprise investors in 2018, says Roland Head.

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Where’s the best place to find growth stocks in today’s market? Many popular growth stocks have become very expensive despite uncertain outlooks so, in this article, I’m going to look at two alternative choices you may not have considered.

Banking revival

Royal Bank of Scotland Group (LSE: RBS) hasn’t reported an annual profit for nine years and some of its other news has attracted negative headlines (branch closure and job cuts). But on the plus side, it recently reported its third consecutive quarterly gain, with a Q3 pre-tax profit of £871m. In the accompanying results statement, management confirmed that “RBS remains on track to achieve all of its 2017 financial targets”.

Big banks are complex businesses for investors to understand. But one thing that seems clear is that City analysts — who are well briefed and benefit from financial tools to model banks’ profits — believe the outlook is improving.

Consensus forecasts for 2017 adjusted earnings (excluding misconduct charges) have risen by 52% over the last year, from 16.3p to 24.8p per share. This positive momentum is very important, as it often drives a strong share price performance.

Only one problem

RBS is expected to agree a multi-billion-pound settlement with the US Department of Justice before the end of the year. If it goes ahead, this is expected to result in the bank reporting another full-year loss.

The good news is that this should resolve the last of the big legacy issues facing the bank. Looking ahead, underlying profitability seems good. If the settlement goes ahead, it should pave the way for the bank to report ‘clean’ profits next year.

Dividend payments are also expected to resume in 2018, during which the government is expected to continue selling its stake in the bank.

RBS stock currently trades on a forecast P/E of 11, with a 9% discount to tangible net asset value. I see the shares as a buy at this level — a view shared by fund manager Neil Woodford.

A fair price?

Housebuilder Countryside Properties (LSE: CSP) floated on the London market in February 2016. Less than two years later, the firm’s shares have risen by about 50%.

That gain has been enough to persuade Oaktree Capital, the private equity group which floated Countryside, to take some profits. Oaktree has just sold nearly two-thirds of its remaining holding in Countryside at 340p per share, resulting in a £229.5m payday.

It’s natural for private equity firms to make an exit after they’ve floated a stock, so this isn’t necessarily a warning of troubles ahead. But it’s probably fair to assume that Oaktree understands this business better than most stock market investors. So I think it’s worth questioning Countryside’s valuation relative to its peers.

One metric I often use for housebuilders is the price/tangible book value ratio (P/TB). Countryside’s tangible net asset value per share was 139p at the end of September. That gives the stock a P/TB of 2.45.

That’s higher than rivals such as Taylor Wimpey, Barratt Developments and Bellway, even though all three of these firms have similar, or higher levels, of profitability. Countryside’s forecast dividend yield of 3.9% is also lower than the payout available from some rivals.

In my view, the shares are probably priced about right at current levels. If I was investing in a housebuilder today, I’d probably look elsewhere in this sector.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Roland Head owns shares of Royal Bank of Scotland Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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