Shares in Royal Bank of Scotland Group (LSE: RBS) have fallen by 35% over the last year. Although this should be seen against a sector average fall of 30%, it’s still bad news.
RBS shares now trade at levels last seen in 2012 despite the progress made since then in restructuring the bank. Is this a contrarian buying opportunity? It’s hard to say.
RBS still needs to prove it can cut costs and improve profitability. In 2015, its costs swallowed up 72% of its income. The equivalent figure for Lloyds Banking Group was 49.3%.
A further £800m of cost savings are planned for this year. Chief executive Ross McEwan says that the majority of restructuring should be completed in 2016, enabling RBS to focus on improving profitability from 2017.
RBS shares now trade on a 2016 forecast P/E of 12, falling to 9.7 for 2017. If profit margins can be improved, then the shares’ current 50% discount to book value should decrease, potentially delivering big gains.
RBS could be a contrarian buy, but I suspect you’ll need to be very patient.
Does cash call spell trouble?
Cobham (LSE: COB) shares fell by more than 20% last month, after the firm announced a £500m rights issue. The money will be used to cut the firm’s debt, which ballooned from £453m to £1.2bn in 2014 as a result of the £869m acquisition of electronics firm Aeroflex.
Raising cash now to avoid the risk of breaching banking covenants makes sense. Indeed, it’s tempting to say that Cobham could now be an attractive buy. The firm’s profits are expected to rebound in 2016 and at 158p, Cobham shares trade on just 9.3 times forecast earnings.
Cobham has also indicated that it will maintain a total dividend payout of £126m following the rights issue. I estimate that this could equate to a dividend of about 8p per share, giving a potential yield of about 5%.
The problem is that net debt will remain fairly high. The group’s mixture of engineering and aviation businesses has been hit hard by the mining and oil downturns, meaning the near-term outlook remains uncertain.
This cash pile could disappear
Shares in Reckitt Benckiser spin-off Indivior (LSE: INDV) have fallen by 20% so far this year. The problem is that profits from the firm’s Suboxone Film opioid addiction treatment are crumbling due to competitive pressures.
Indivior’s operating profit fell by 12% to $101m during the first quarter, while post-tax income fell 34% to $50m. In a trend that’s being seen across the US pharmaceutical sector, Indivior is selling Suboxone at full price and then offering rebates to customers. This results in higher sales but lower profit margins.
Although Indivior left full-year guidance for profit of $155m-$180m unchanged in its first-quarter results, this relies on the assumption that no generic alternatives to Suboxone Film will be approved by the US authorities. A number of generic applications are pending, so this is a big risk.
Indivior doesn’t have any patent-protected commercial products that can replace profits from Suboxone. The firm’s pipeline of new treatments is fairly minimal. I suspect Indivior may use its $543m cash pile to fund an acquisition, but a suitable target could be hard to find.
In my view the outlook is too uncertain for Indivior to be a buy.