Standard Chartered’s (LSE: STAN) shares have been falling since early 2013 and they dropped another 5% or so this morning when the Asia, Africa and Middle East-focused banking firm released its full-year results.
At around 410p today, the shares are a shadow of the 1800p they reached during 2010. Investors who dodged that bullet by avoiding Standard Chartered shares deserve a pat on the back. However, just because the shares are down, I’m not going to get all contrarian and start wondering whether there is decent value in Standard Chartered and the potential for a comeback.
Profits down
To me, the big banks are just too opaque to make realistic potential investments. I know my investing limitations, and making a decent stab at predicting forward trading at Standard Chartered and its peers is one of them. I only become wise after the event, such as this morning with the banks results, which are not that pretty.
Underlying pre-tax profit came in down 84%, which the company puts down to challenging market conditions and its own restructuring. To underline the grim situation, the directors confirmed an earlier decision not to pay a final dividend for the year, with the firm’s chief executive saying,
“While 2015 performance was poor, the actions we took on capital throughout last year and in particular in December have positioned us strongly for the current macro environment. We have a balance sheet that is resilient and we are in the right markets. We have identified our risk issues, and we are dealing with them assertively.”
Standard Chartered insists it is “strongly capitalised with a highly liquid balance sheet,“ and quotes a Common Equity Tier 1 (CET1) ratio of 12.6%. However, that’s not enough to make me interested. There are better recovery plays out there, if I were interested in a recovery play, and better businesses to invest in full stop.
Profits up
The situation at InterContinental Hotels Group (LSE: IHG) is completely different. The shares shot up over the last five years or so, and today’s full-year results deliver more good news.
Adjusted earnings per share rose 10% for the year, net debt declined by 65% and the directors raised the ordinary dividend by 10%. On top of that, the company proposes to pay a special dividend costing $1.5 billion.
InterContinental Hotels Group is thriving, and the firm’s chief executive says,
“Our strong momentum in 2015 was driven by a clear strategy and disciplined execution. We delivered our highest room openings since 2009 … Our high quality, fee based, business continues to generate significant operating cash flows following the completion of our major asset disposal programme.”
InterContinental Hotels Group is a pure play in the hotels sector and operates its hotels with long-term management contracts rather than by owning the buildings. That strikes me as a strategy with potential to offer greater flexibility to help the enterprise cope with the cyclicality inherent in the sector.
A bit pricey
At today’s 2,534p share price, the firm trades with a forward price-to-earning ratio of just over 20 for 2016. Much as I admire the firm’s set-up, that’s too rich a valuation for me, and I’m concerned that valuation-compression may drag on investor total returns from here.
