Stephen Bland runs the numbers on RBS.
Last week I wrote about price/tangible book value (PT/B) being, in my view, the king of the value ratios. As a result, I added to the holding of Royal Bank of Scotland (LSE: RBS) in my value portfolio, purely on the basis of its very low P/TB of around 0.5.
When it comes to RBS, there isn't much of any other value basis to mention, because it has no dividends, makes losses and, as a bank, has large debt. A pure asset play then.
An unusual value feature
Trading under tangible book is especially unusual for a FTSE 100 company, because very big caps rarely exhibit this trait. In fact, it is not that common anywhere, but when it does occur it is more usually a feature of small cap value plays. But the reason here with RBS is well known, and it arises from the comprehensive trashing of so many banks in the recession. In their case, it was bust and was rescued by the government to protect depositors.
Luckily for shareholders RBS retained a stock market listing, thus leaving the door open for eventual recovery, even though the price fell at one stage to 10p. That contrasts favourably with Northern Rock, where shareholders there lost the lot.
RBS has just issued final results for the year ended 31 December 2011, so I'll review this in my inimitable style, with my guff filters running full blast. That's because RBS reports are always of astronomic prolixity, requiring the endurance of a channel swimmer to crawl through from start to finish.
I don't normally know, or want to know, the names of the bosses of companies in which I'm interested, that's getting in far too close for my liking. In this case, it is hard to avoid Stephen Hester, so frequently is he referred to in the non-financial news, most recently regarding the bonus he gave up. Wrong move Steve. You should have kept it and put two fingers (or these days more aptly a Euro middle one) up to the politicians. They gave you a contract to turn round this huge failed business, and now they've dishonoured it before you've had the chance to prove whether you'll make it or not.
The key number
The key figure for me in the accounts, from an investor's viewpoint, is that they make a point of referring to tangible net asset value and not buried away somewhere but prominently on page one in the first of eight sections of the online version of the results. I like that because I like P/TB, and because it is quite unusual in company statements to refer to asset value at all, outside of those companies that are valued on net assets like property shares.
And even where some do quote a figure, it is extremely rare to see tangible net asset value. Mostly it will be just asset value, and thereby include intangibles like goodwill. Tangible asset value will be lower to the extent of intangibles excluded, and I have to applaud them for publishing this figure and saving me the hassle of working it out myself.
Much more than the welcome feature of not disturbing my indolence though, the publication of the figure where it can't be missed means, I presume, that they see it as one measure of performance. That's even better, because that is my value reason for choosing the share. If they are willing to publicise tangible book in this way, it suggests strongly that they are also, in a sense, betting on it and desire its increase.
Book value now
And the latest tangible book figure is 50.1p per share, which is down slightly from 51.1p a year earlier, and down slightly more from the 52.6p recorded at the previous quarter end of 30 September 2011.
The share price has reacted positively so far to these latest figures. It is now at 28.6p, giving a P/TB of 0.57. That remains painfully low and unpainfully attractive. It's up a couple of pence on my latest purchase in the portfolio, but still down on the average price of 33.5p because my earlier purchase was at a higher price.
You might think I'm crazy to consider this figure alone from amongst the staggering amount of data that always fills up RBS accounts. Sure, I could go on about their core operating profit of £1,892m, down fractionally on last year. Or their net loss of £766m, after writing down Greece etc, up from £399m last year. Then there's Tier 1 ratios blah blah. But all that has been blocked by my guff filters.
If you possess the patience of a corpse, you can find all that stuff there for yourself but will it tell you all that more about RBS as a value play? I doubt it. But that's me for whom less is nearly always more, and the more detail you know about a share, the less you know about a share.
Concluding, nothing in this report tells me I was wrong to go more heavily into RBS. Had tangible book been blown, then I would eat wossname and withdraw. I'm always willing to admit if a play goes wrong. But with tangible book around the same figure as previously, and little change in the price, I believe this remains a good value proposition.
As always with this strategy, investors must be prepared to exercise patience. Value will out, but I can't know when.
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