Friday, 30 October 2015

Friday European results thoughts: RBS, BG Group, A-B InBev

Another big results day especially adjusting for the fact that it is a Friday.  Let's start with some European reporters.  

RBS - 
Back in July I observed that the scope for a run to a 400p a share was apparent (link here).  Today's inevitably messy numbers (attributable profit, operating loss and the observation that 'RBS remains well on track to achieve substantially all its priority targets for 2015. The cost savings target for the year has already been exceeded'

I also observed on Twitter re the final element of the Citizens Financial disposal:

achieve that 5% leverage ratio & post Citizens disposal above this

Meanwhile the underlying asset value move piqued my interest:

Instinct on that beating/raising simplification targets most important comment. Trading at x0.82 TNAV now. Hmm

Of course the return on equity for the group is suitably opaque with the 'illustrative go-forward business profile' for the core business showing a 10% return on equity although adding on non-core dilutes this to 5%.

What is notable is that at the above link there is the equivalent chart from Q2...and what it shows is the sensitivity to lower income and higher costs (adjusted RoE from 16% to 10% and hence the blended RoE from 11% to 5%):

'With the company's shares in the mid 350s now they are trading around x.0.9 tangible book which is good value if you perceive the overall group is generating 11% RoE...of course this is 'adjusted'.  But the scope for a 400p+ share price is still there IF the turnaround plan is successfully applied'

Therein of course lays the opportunity and threat with RBS...and why the simplification push noted above is so critical.  If you get some further traction there then the seemingly inevitable cost and regulatory value inflation can start to be countered...and the UK government can start to offload their majority stake. Put it all together and the story becomes a leveraged management execution play.  I would say risk-reward is skewed in favour of a higher price. 

In short that sounds like a 300-400p share price range to me, so at the current c. 315p price the share price feels opportunistic...but as with all management led turnarounds you have to be a believer.  

BG Group - 

The UK-listed oil/gas/LNG player was mentioned in my Royal Dutch Shell write-up yesterday (link here) where I observed that the company was an important part of Shell's forward strategy (as they should be given the size of the deal to bring the two companies together).  

I found the conference call largely tiresome and almost the totality of my notes are below:

‘on track to exceed cost saving targets this year’

Not guiding re cash costs ‘working towards creating a resilient BG’

$2bn outflow at $55 oil. Think ‘significant scope to bring down our capital spend further’

‘China one of the biggest sources of uncertainty next year…China’s gas market has grown materially over the last year’

‘I am not going to predict whether the market is going to bottom in 2016 or 2017…the market changes very quickly e.g. India…where demand has ramped up very quickly due to lower prices’ 

My view is that the company's numbers today were - in the wider scheme of things with falling oil prices and hence inevitably compressed profitability - perfectly operationally reasonable:

As I noted on the Shell link I like what the deal is trying to do and at prevailing share prices BG Group shares trade a a 10%+ discount to the theoretical deal value.  For an early 2016 anticipated deal close that equates to value in a generally value-centric area.  

Finally, Anheuser-Busch InBev - 

Another company involved in a deal (this time with SABMiller) and any reluctant shareholder in the latter would have to be grudgingly impressed by this: 

 That smells like branded centred pricing power to me...

Underlying this pricing power for me the most important observation in the report was this one: 

'We are amending our guidance. Our previous guidance was for revenue per hl to grow organically in line with inflation, on a constant geographic basis, as a result of our revenue management initiatives and continued improvements in mix. We now expect revenue per hl will grow ahead of inflation due to higher than expected premium brand volumes'

With continued dividend progression...

...and with the shares prospectively around the x16 EV/ebit level (not too unusual for a leading consumer company with a c. 3% yield) I think the shares are reasonably in a c. US$105-125 range.  Yes the implied price paid for SABMiller - if that deal completes - is full but the brand enhancement / synergy value is high too even if the level of divestments required will be high.  Net net trade the range currently...and watch the deal / general continued execution as this one remains a consumer behemoth performer.  

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