There may be speed bumps along the way, but the secular growth story of Asia remains very much intact. If you’re looking to add some Eastern spice to your portfolio, FTSE 100 companies Standard Chartered (LSE: STAN), Rolls-Royce (LSE: RR) and Burberry (LSE: BRBY) all have substantial exposure to Asian markets.
Standard Chartered has its roots in British colonial banking ventures of the Victorian era. The history is reflected in the geographical composition of Standard’s operating income today: 69% comes from Asia.
Standard’s geographical focus enabled it too look on smugly as western banks imploded during the 2008/9 financial crisis. But what goes around comes around, and today Standard is having its own crisis. Bad debts have been on the rise, various parts of the business have underperformed, and earnings have dived. As a result, a wholesale boardroom clearout has recently been announced, and talk of a capital raising and dividend cut is rife.
Standard trades on a modest current-year forecast P/E of 11.5, but I think we need visibility on how new management intends to overhaul and reposition the company. Besides, I don’t personally believe banking is the best play on rising wealth in Asia. My preference would be for companies with distinctive, differentiated, quality products
Rolls-Royce’s engines are renowned the world over. Nevertheless, I was surprised to discover just how much revenue the company is generating from Asia. In 2014, 25% of revenue came from Asia (and 5% from the Middle East). I mention the Middle East because when it comes to Rolls-Royce’s £74bn forward order book, the company combines the two regions: Asia and the Middle East account for 44%. The biggest addition to the order book announced since the year end has come from Air China ($1bn).
Rolls-Royce had a mixed 2014, generally, and there are headwinds for 2015, including unfavourable exchange rates and a low oil price creating uncertainty among customers of the company’s Marine business. Nevertheless, the record order book gives confidence, and recent bright spots include stronger defence budgets in Asia and an increased demand for security at sea in the region.
Rolls-Royce trades on a current-year forecast P/E of 16, falling to 14.8 next year — which looks reasonable value for a high-quality business likely to see growing demand from increasingly wealthy customers in Asian markets.
While Rolls-Royce is a business-to-business play, iconic British fashion house Burberry taps into rising consumer wealth.
Burberry’s revenue from Asia (on the same regional boundaries as those of Standard Chartered and Rolls-Royce) is a little difficult to discern from the geographical information within the company’s latest annual report. Burberry reports £870m of revenue from “Asia Pacific” in its retail and wholesale channels. (“Asia Pacific” includes Australia, but the seven Aussie stores perhaps net off against nine stores in India, which, oddly, isn’t included in the company’s Asia Pacific segment.) In Burberry’s licensing channel, we only know that 80% of £79m revenue comes from Japan. My sums suggest Asia accounts for 40% of Burberry’s total revenue.
Burberry’s shares aren’t cheap on the face of it: the forecast P/E for the company’s fiscal year ending today (31 March) is 23, falling to 21 for the upcoming year, and 19 for the year after. However, earnings are forecast to grow by double-digits annually, so the rating is not outrageous for a brand with such a strong franchise.
As I mentioned earlier, I think the investment outlook for Standard Chartered is too uncertain to call at the present time. However, Rolls-Royce’s exposure to government and business spending and Burberry’s exposure to consumer spending strike me as offering a nice combination of growth themes that could pay off for shareholders in the long term.
G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.