Today I am looking at three London-listed firms that I believe are excessively expensive.
Royal Bank of Scotland Group
In my opinion Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) is set to endure a prolonged period of earnings pain as its programme of over-aggressive asset stripping smashes its revenues outlook. Indeed, the bank’s Luxembourg fund management business was the latest unit to hit the market just this week. On top of this, the business also faces colossal problems in the form of steadily-creeping legal penalties, as well as rising impairments.
It is true that, by conventional metrics, Royal Bank of Scotland deals on splendid P/E multiples below the value threshold of 15 times prospective earnings — the firm sports readings of 12.1 times and 11.7 times for 2015 and 2016 correspondingly. But these figures lag forward readings of 10.6 times for Barclays, 9.9 times for Lloyds and 11.1 times for HSBC, banks which all have better growth prospects than their sector peer.
On top of this, Royal Bank of Scotland is still to get the go-ahead from the Prudential Regulatory Authority to start shelling out dividends once again. City analysts expect the bank to get the nod later this year, however, resulting in predictions of a final payment of 1.8p per share. And even though 2016 is anticipated to provide a full year of dividends, an estimated total payout of 6.6p creates a paltry yield of just 1.9%.
Antofagasta
I fully expect the bottom line at copper producer Antofagasta (LSE: ANTO) to remain under severe pressure as insipid growth in the global economy smacks demand for the red metal.
Bank of America-Merrill Lynch was the latest broker to slash its copper price forecasts for this year and next on the back of slowing Chinese demand. The commodity is now expected to average $5,784 per tonne in 2015, down from the $6,425 previously forecast, and for 2016 the broker reckons copper will average $4,969, a reduction from the prior estimate of $5,864. Three-month copper was recently dealing at $5,900 per tonne.
So expectations of a 28% earnings rebound at Antofagasta in 2015, as well as a 29% improvement in 2016, are mere pie in the sky in my opinion. But even if these projections were to be met, the business still deals on an elevated P/E ratio of 18.6 times for this year, although this drops to 14.9 times for 2016. Still, I would consider a reading below the value watermark of 10 times to be a fairer reflection of the risks facing Antofagasta, and indeed the entire mining sector.
Soco International
Like Antofagasta, I reckon that oil explorer Soco International (LSE: SIA) will continue to suffer from the effects of worsening supply/demand dynamics in the natural resources sectors. Brent prices have traded in a tight range between $50 and $60 per barrel during the past few months as swathes of US shale rigs have been disconnected, a welcome relief given the precipitous oil price decline that kicked in since last summer.
But I believe that this recent calm represents nothing more than a temporary break before prices head lower again. Indeed, the International Energy Agency (IEA) announced today that production from industry cartel OPEC rose at its highest rate for almost four years in March, leaping by 890,000 barrels per day to total around 31 million barrels. With Russian and US output also heading higher, the market remains swamped with excess crude as global off-take remains weak.
Bafflingly the City expects Soco International to record earnings growth of 204% and 91% in 2015 and 2016, shifting the P/E multiple from 18.7 times for this year to 10.4 times in the following 12-month period. With murky oil price predictions casting doubt on the viability of its capex programme, and the firm having downgraded its reserves back in March, I believe the fossil fuel play carries far too much risk at the current time.