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Questor: keep buying OneSavings Bank – there’s no need to take fright from Metro’s woes
Questor share tip: Metro’s shares collapsed last week after a profits warning but OneSavings is a very different animal
We are off to a good start with our advice in November to buy OneSavings Bank as the shares have already gained some 10pc.
There is no news scheduled from the company until full-year results in March but last week’s share price collapse at rival Metro Bank means it is worth revisiting the investment case to check for any possible flaws.
Metro delivered a mighty jump in pre-tax profits for 2018, to £50m from £21m. Analysts had been hoping for a figure closer to £60m, so that still registered as a disappointment, despite strong increases in customer numbers and deposits.
Worse, Metro admitted that some of its commercial loans, especially to large buy-to-let landlords, might be riskier than first assumed. This increase in its so-called “risk-weighted assets” raised the question of whether Metro could have to sacrifice growth or tap shareholders for cash, hot on the heels of last year’s £300m fund raising, to ensure that it had enough capital to keep the regulator happy.
This means investors must study OneSavings’ results for any signs of a slowing in loan growth, increases in the “loan-to-loss” ratio or pressure on net interest margins as competition heats up.
A third-quarter update in November reassured on all fronts but given the bank’s exposure to mortgages and smaller companies and its strong focus on buy-to-let there are clear risks. Any repeat of Metro’s risk-weighted asset troubles could increase funding costs and therefore put pressure on profits.
At the same time, there are significant differences between Metro and OneSavings. Metro was trading at around 50 times earnings before the alert (and is still on nearly 25 times for 2019, even after the share price plunge). Nor does it pay a dividend.
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By contrast, OneSavings trades at about seven times forecast earnings and its well-covered dividend offers a yield of 3.7pc. Analysts also expect mid-single-digit trend earnings growth, not huge year-on-year leaps, which hopefully leaves OneSavings investors less of a hostage to fortune.
For the moment, we can relax and put Metro’s woes down to company-specific issues while maintaining our guard, with our case for OneSavings buttressed by that lowly valuation, the Chancellor’s apparent determination to support the housing market via the extension of the Help-to-Buy scheme and OneSavings’ 13.3pc common equity tier one (CET1) capital ratio.
The bank still appears to offer a good combination of yield and contrarian value.
Questor says: buy
Ticker: OSB
Share price at close: 386.2p
Update: Cineworld
This column was content to support Cineworld’s £2.7bn purchase of America’s Regal Entertainment and a trading statement earlier this month appeared to offer plenty of reassurance that the acquisition was delivering and that the underlying market remained sound.
But a look behind the scenes of the film industry offers some grounds for concern and, although Regal will doubtless offer scope for revenue and cost synergies, Cineworld’s increased debt pile is a worry and leaves little room for disappointment.
- Questor archive: telegraph.co.uk/questor
The firm announced a 7pc rise in sales, driven by a 6pc increase in box office takings underpinned by new site openings, venue refurbishment and investment in technology and the customer experience.
A strong slate of films helped, too, and 2019 looks equally promising, with more releases from the Avengers, Lego, Star Wars, Godzilla and Spider-Man franchises all lined up. But these headlines could be deceptive. US sales did jump in 2018 but 2017 had been the worst year at the box office since 1995. Last year’s increase only took the US market back to 1997 levels. In addition, just five films generated 23pc of American ticket volumes.
While it’s unlikely that any of the films named above will be turkeys, such heavy dependence on a select number of releases does not sit comfortably with Cineworld’s acquisition-related debts, especially as digitally streamed competition is capable of persuading viewers to stay at home.
A safety-first policy suggests this is the right time to reluctantly pull the plug on the stock, first tipped in May 2017. Adjusted for last year’s rights issue and dividends received, our loss is 5pc.
Questor says: sell
Ticker: CINE
Share price at close: 266p