Bank stocks are on the nose with investors with bad corporate behaviour, weaken balance sheet and falling interest rates conspiring to keep the sector on a backfoot.
But there’s one bank stock that may be the exception – and that’s UK-based Virgin Money UK PLC (ASX: VUK).
The stock surged 23% during lunch time trade to $3.30 when the the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is struggling to hold above breakeven.
The big rally also stands in contrast to other bank stocks. The Commonwealth Bank of Australia (ASX: CBA) share price fell 0.8% to $80.93 while the National Australia Bank Ltd. (ASX: NAB) share price lost 1% to $25.93. The latter used to own Virgin Money when it was called CYBG before it merged with Virgin Money UK and took over its name.
Valuation discount closing
Virgin Money excited investors today on its reassuring profit result and Macquarie Group Ltd’s (ASX: MQG) bullish note on the stock.
“Virgin Money delivered a broadly in-line underlying pre-tax FY19 result. Management took the opportunity to provide margins guidance, reiterate LT [long-term] expense targets, and gave some comfort around PPI and capital position,” said the broker.
“With the stock trading at just ~0.55x P/NTA [price to net tangible asset], this was enough to alleviate some of the market’s concerns and coupled with reducing Brexit uncertainty resulted in discounted valuation being partly unwound.”
The big relief for investors was comments from management that the provisions it set aside to compensate aggrieved Payment Protection Insurance (PPI) customers is likely to be sufficient.
The stock suffered a big sell off and management’s credibility took a big hit on a shock announcement in September that reimbursements could be much larger than initially thought.
This doesn’t mean the stock is out of the woods as it’s still facing a challenging revenue growth environment, but at least Macquarie thinks the bad news is more than reflected in the current share price – even after today’s big jump.
“We believe it will be difficult for VMUK to meet its guidance of 12% RoTE by FY22 if current operating conditions persist and forecast sub-10% RoTE,” said the broker.
“However, even after today’s re-rating, the stock is trading at 0.7x NTA and ~20% discount to peers. In this context, we continue to see the relative and absolute value.”
Better dividend buys
Macquarie is recommending the stock as “outperform” (meaning it’s a “buy”) with a 12-month price target of $3.70 a share.
Unfortunately, Virgin UK doesn’t pay a dividend, although that could change in FY20 as the broker is tipping a 4 cent a share payment.
That doesn’t give the stock much of an yield but if you are looking for well-priced ASX stocks with better dividend bang for your buck, download the free report below from the experts at the Motley Fool.
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The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019