UK Edition
Questor: battered by the Brexit blues, OneSavings Bank now offers compelling contrarian value
Questor share tip: it’s the kind of stock that should fly if a Brexit deal is struck, while the 4.1pc yield will protect us otherwise
As Brexit talks continue on so many levels, this column has no idea whether Cabinet, Parliament and the EU 27 can agree on the putative treaty, what the deal may look like or how it may (or may not) affect the British economy.
But with OneSavings Bank, whose shares trade on barely six times earnings and 1.5 times book value while offering a yield of some 4.1pc, one does not have to take a view on any of these imponderables.
If everything goes wrong, the valuation could provide some protection to the share price, while the yield will offer compensation as we tough it out. If a deal triggers a rally in sterling and a resurgence of interest in British assets, stocks such as OneSavings could be in the vanguard of a recovery, especially as loan growth is robust and the firm’s return on equity of 28pc is outstanding relative to its peers.
A trading update this month suggested that the shares’ second-half stumble might have been undeserved. Loan growth of 16pc in the third quarter prompted management to forecast a 20pc increase for 2018; there is no sign of a slowdown in origination and gathering visibility into early 2019.
Meanwhile the bank’s cost-to-income ratio of 30pc is pretty much best-in-class and a loan-loss ratio of 0.11pc is also worthy of note.
Given its exposure to mortgages and smaller companies, and a strong focus on buy-to-let, there are clear risks. Any economic or house price downturn could test sentiment and profits.
But the valuation is already lowly, the Chancellor seems determined to support the housing market, judging by the extension of the Help to Buy scheme to 2023, and OneSavings Bank’s 13.3pc “common equity tier one” (CET1) ratio should help it to weather most storms.
The stock has featured in Questor’s Income Portfolio for two years but its contrarian value should now appeal to growth investors too.
Questor says: buy
Ticker: OSB
Share price at close: 350p
Update: SSE
Our analysis of unloved utility SSE is off to a rocky start, thanks to interim results that lived down to low expectations and debate over whether the Brexit crisis could lead to a change of government.
Perhaps the best news was confirmation of a 97.5p dividend for this year, for an 8.7pc yield, and an 80p payment next year after the planned spinning off of its retail power supply business in a merger with Npower.
But the admission that the deal is to be renegotiated in light of the regulator’s price caps must be followed carefully. The transaction, assuming it goes ahead, will now be delayed until at least the second quarter of 2019 and could even oblige SSE to put more capital into the part to be spun off. That could stoke fears about dividend growth at the remaining core business.
The reassurance on the 80p payment for 2019 is therefore welcome, even if it is likely to be heavily slanted towards the remaining operations and away from the retail spin-off. The break-up still provides a potential catalyst to unlock value.
Questor says: hold
Ticker: SSE
Share price at close: £11.07
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Update: Vodafone
Shares in Vodafone surged after its new chief executive, Nick Read, targeted an unchanged dividend of 15.07 euro cents for the year to March, fending off fears that the firm’s 20-year run of dividend growth would end with a cut.
However, it does look as if cost and capital investment cuts are the prime source of support for cash flow, and thus the dividend, rather than improvements in top-line momentum.
- Questor archive: telegraph.co.uk/questor
That may work in the short term but will make it harder for Vodafone to keep fighting on so many fronts in the longer term. The company already appears to be underperforming rivals in Spain and Italy, while the British and German markets look no less forgiving.
Don’t be swayed by the interims and stay away from this one, given the still-dodgy signals from the firm.
Questor says: avoid
Ticker: VOD
Share price at close: 155.82p
Russ Mould is investment director at AJ Bell, the stockbroker