Worries over the trajectory of the Bank of England’s interest rate decisions, sticky inflation and a possible economic downturn continue to weigh on London-listed financial stocks, and Close Brothers is no exception.
It is not hard to see why, as last week’s results for the year to the end of July were far from easy on the eye: bad debts rose and profits and return on equity fell. However, none of this was unexpected, the balance sheet remained strong and the management felt confident enough to raise the dividend.
Best of all, the shares’ spell in the doldrums means they still look cheap, especially relative to book, or net asset, value.
Shares in the FTSE 250 merchant bank have roughly halved from their spring 2021 peak, not least because of the toxic legacy left by 2017’s purchase of Novitas, a specialist provider of finance to the legal sector.
Close Brothers started to run down the loan book in 2021 but provisions against losses of £73.2m in 2021 and £60.7m in 2022 did not prove enough and Novitas cost the bank another £115m in the year to July 2023.
That mess played a big part in the drop in annual profits before tax to £112m from £233m, but even excluding Novitas, the group’s pre-tax earnings slid to £220m from £274m, thanks in the main to an increase in the bad debt ratio to 0.9pc from 0.5pc and lower earnings from brokerage firm Winterflood, which has continued to suffer from the turgid performance of the London stock market and the lack of new flotations.
However, Close Brothers had already flagged the extra Novitas provisions in January, the woes of the stock market are not news either and the increase in bad debts is modest.
More encouragingly, the loan book grew by 5pc, the net interest margin barely flinched at a very healthy 7.7 percentage points and the asset management arm generated business inflows, in stark contrast to the outflows suffered by many rivals.
In addition, the balance sheet is sound, since a 13.3pc “common equity tier 1” (CET1) ratio easily exceeds the 9.5pc required by the regulator.
Nor should investors forget that Close Brothers’ banking arm tends to come into its own during tougher times, as it tends to lend contra-cyclically, when mainstream lenders are running scared.
This helps the bank to make that fat net interest margin. Best of all, the share price slide means a lot of bad news may already be factored into the valuation.
A £1.3bn market value compares with shareholders’ funds, or net assets, of £1.64bn. Strip out £264m of intangible assets and the tangible book value is £1.38bn, so the shares trade around book value.
That, and a forecast dividend yield of some 8.3pc, should help to provide some protection as shareholders patiently await a recovery in earnings. Hold.
Questor says: hold
Share price at close: 845p
Update: Yellow Cake
As we speculated last month, Yellow Cake has taken advantage of the surge in its share price to raise £103m via a placing priced at 550p.
The new shares have caused no indigestion whatsoever and the share price has already advanced, buoyed by an increase in uranium prices to $70 a pound, their highest level since 2010.
We may already have a paper gain of 160pc but this story could yet run – and run. The funds will be used to buy 1.5m pounds of uranium oxide from Kazatomprom, Kazakhstan’s uranium miner, in keeping with an agreement that enables Yellow Cake to buy up to $100m of uranium every year until 2027.
The new supply, acquired at $65.50 a pound, will take Yellow Cake’s holdings of uranium oxide in its specialist warehouses to more than 21.6m pounds.
If that hoard is valued at the prevailing spot price and then adjusted for the sterling-dollar exchange rate, the cash on the company’s balance sheet and the increased number of shares, the net asset value (NAV) comes to around 590p a share.
That leaves only a modest discount, but if the uranium price keeps rising so will the NAV. Kazatomprom’s statement last week that it will increase output in both 2024 and 2025 reflects how demand for uranium is heating up as nuclear power makes its case as a solution to energy security from a low-carbon source.
Yellow Cake is well placed to benefit from any scramble for supply. Hold.
Questor says: hold
Share price at close: 552.5p
Russ Mould is investment director at AJ Bell, the stockbroker
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