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Mark,
Debt and cash rolling in are important but not the main driver behind the low share price. Profit margin has been in free fall for years. The company clearly don't have the pricing power that they allude to when highlighting their vertically integrated business model.
I am a little surprised that RBS are purchasing such a small book of business. The mortgage market needs consolidation and RBS are in a great position to take advantage. Why pay 3% above book value for a £3bn mortgage book when Virgin Money with £70bn of assets, predominantly 65% LTV mortgages, trades at 0.6 times book value?
Capital isn't the issue, profitability is.
Mortgage rates need to hold up. And so far, so good. Other banks preoccupied with business loans and defaults, taking pressure off mortgage market pricing. Once attention turns back to mortgage market, should see mortgage pricing factor in higher inflation. All in all, expect NIM to hold up reasonably well, but lots of moving parts.
Tuxedo8, More4Less,
IMHO, Virgin Money is the most undervalued. Only 11% of their lending book is business lending vs 21% for Lloyds and 31% for RBS, so lower credit losses. They have a higher cost of funding so benefit more from TFS. And they have a lower capital ratio so benefit more from the relaxation of capital requirements.
The capital ratio of RBS is too high. In times of recession this would normally be the most important factor. However, given how accommodating the government have been, in effect protecting the banks, the capital ratio, while still important, is less relevant.
Lots to think about.
The BoE allowing banks to use their liquidity buffers, in addition to their counter cyclical buffers, is a major win. Particularly given that this additional capital will go towards high margin CBILS loans. This comes off the back of regulators encouraging banks to be "optimistic" about expected credit losses. The market seems to be looking beyond all of this, maybe focusing more on the long term impact of lower interest rates and levels of indebtedness.
Good to see that common sense seems to be prevailing regarding the application of IFRS 9 accounting and the concept of expected credit losses. This is significant as it will free up capital, allowing banks to open up the tap to more high margin, capital efficient CBILS loans. Strict adherence to the Standard (focusing on the fall in GDP etc with little allowance for the government stimulus) would have left little free capital to lend, exacerbating actual credit losses.
Strictly,
What was your thinking behind index linked gilts?
Was this a recent switch? All I can see moving forward is deflation, as the increase in the supply of money is more than offset by the reduction in the speed at which the money moves around the economy.
Personally, I do not see the reason for investing here. For the next 5-10 years, the growth of workplace pensions and equity release is not going to make up for the loss of profitability from individual annuities (lower new business volumes and more competitive pricing). And I am surprised that the bulk annuity market is buoyant at the moment given long term interest rates are so low.
whitelye,
I could have sworn the accounts stated that around £150m of claims was 'virtually certain' and implied around £35m of claims was probable, across both AWPR and Queensferry Crossing. For me, this write down really is a significant turn of events. I would go as far to say that the rump is now not investable.
londoner7,
That was a nice article. However, Im firmly of the belief that Help to Buy will be extended well beyond 2023. In my view, it really is only beginning. Heck, only last week Scotland rolled out a new initiative. The number of houses being built each year is still well below the number that need to be built. Couple this with the fact that house builders are rewarded for maximising profits rather than how quickly they meet this need, then you can quickly see why they do just enough each year to avoid government intervention while maintaining pent up demand and sales prices. This is going to be a long drawn out affair. Dare I say, house builders are a cartel. They don't even compete against each other.
That is some investment discipline all those who waited, well done. Remember not to sell too early now.
Me, I was right in there at the opening bell.
Senior management simply know more, and, in my opinion, whenever senior management start quoting Financial Reporting Standards, the trade quickly becomes risk-free, regardless of share price movement.
This is the type of company that Mr. Buffett would like - vertically integrated, strong customer base, slow burner.
Good opportunity in the Far East.
Highly priced - 23x earnings for a capacity constrained company is pricey. Even after the new chicken processing facility in Eye has reached full capacity (increasing revenue by 30%), the company will still be priced around 20x earnings.
Would be interested around 16x earnings (£21.50)
thorpyuk, Boschybear, karv1,
Don't forget about the £150m of "virtually certain" claims and £35m of "probable" claims that are not currently allowed for in the cashflow statement nor the net debt/cash position. Post Bovis deal and post claims Galliford Try are expected to have net cash of £300m+.
Also, I wouldn't get too bogged down on what will happen to the £300m Bovis cash. It will find its way to the shareholders either in the form of a higher share price (20p EPS) , a very high dividend yield (covered 2x by pre-exceptional profits = 10p dividend), or a share buyback (net cash greater than market cap).
Philpot,
The contracts may be the same (after all, this is where the company specialises) however the key difference is with whom the contracts have been agreed. Galliford Try have a good working relationship with Highways England. In fact, this was the reason why they won the contracts. I suspect there will be little work agreed with the Scottish Government going forward.
Meeting MREL requirements is not a problem for Metro Bank. One of the benefits of having a baller as chairman is that the bank is not susceptible to artificially inflated costs of raising debt, particularly not when only £250m is required.
Pokerchips, HeresHopin,
You have it round the wrong way. If I were to take up the scrip dividend then I would own a greater proportion of the company going forward than I did prior. Similarly, if I were to buy more shares in the open market using the cash dividend then I would own a greater proportion of the company going forward than I did prior. It is those shareholders who need the dividend for income whose holdings are diluted. Retaining cash is a by-product of scrip dividends. Retaining cash is never a reason for scrip dividends.
Here is an example to try to shift you both from your current thinking. Imagine a company wanted to conserve cash. Rather than issue no dividends, it decided to issue scrip dividends to all shareholders. No shareholder would then be diluted as they would hold the same proportion of the company as they did previously. However the company would have less cash as it would have had to pay tax at source on the scrip dividends.
Pokerchips,
Scrip dividend = dividend reinvestment plan. There has to be dilution in order to differentiate between those who take cash and those who choose to reinvest. By taking cash and buying in the open market, you would end up in the same position as taking a scrip dividend, less stamp duty and dealing costs. Scrip dividend has nothing to do with whether the company can afford it or not, but instead whether the shareholder needs the income.
Strictly,
For me, the question that you posed depends on whether you focus on absolute return or return relative to a particular benchmark. Personally, I focus on absolute return. I would therefore prefer to underperform the market and grow my wealth than outperform the market but lose wealth. A significant holding of cash, at all times, is a must for an absolute return investor. As share prices rise the absolute return investor's wealth rises in the short term. As share prices fall, the absolute return investor's wealth rises in the long term, as shares are purchased at lower prices. With this in mind, cash generates a higher return than any other asset class, hands down.
Bamps,
You have got the short term and long term borrowings the wrong way round. It is the long term borrowing of £100m that Bovis will inherit. Galliford Try also have more than sufficient cash (£591m) to cover borrowing due within the year (£450m). This is laid out in Note 14 within the recent financial results.
For completeness,
the additional £98m of short term borrowing refers to bank overdrafts , there is also £150m tied up in working capital