As details of the UK’s divorce agreement with the European Union have emerged, investors have been quick to dump shares in Royal Bank of Scotland (LSE: RBS).
It is easy to see why. The bank is significantly exposed to the UK economy, and it has barely recovered from the financial crisis, but management is already getting ready for another downturn. In October, the company warned that it has put £100m aside for bad debts due to the “uncertain economic outlook,” and trebled the amount it has set aside to help SMEs navigate Brexit to £3bn.
Preparing for the worst?
These preparations seem to indicate that RBS’s management team is preparing for the worst. But as of yet, we don’t know how Brexit will unfold, and if it will be as bad as some analysts are expecting.
If it isn’t, and economic growth suddenly recovers, I think shares in RBS could quickly bounce back. After all, the stock is trading at a significant discount to the bank’s tangible asset value per share, which was 288p at the end of September.
This discount would be understandable if RBS were still loss-making, but with the company on track to report a net profit of nearly £2bn for 2018, I don’t think the discount is warranted. That being said, there are other factors to consider here, such as the government’s substantial stake in the bank, which is acting as an overhang on the shares because sooner or later, it will have to be sold.
Still, when compared to its peers both here in the UK, and across Europe, shares in RBS undeniably look cheap. However, this is not a bet for the faint-hearted. Only time will tell how the UK economy will react to Brexit and if RBS’s £100m provision for bad loans will be enough.
So, while the stock could jump substantially from current levels, most investors might not be comfortable with this level of uncertainty. If you fall into this bracket, you might be more interested in FTSE 250 turnaround situation Mediclinic International (LSE: MDC).
FTSE 250 turnaround
Mediclinic is an internationally diversified healthcare facilities provider. Unfortunately, the group has fallen out of favour with investors recently after booking a series of impairment charges on its UK and Swiss businesses for a total of £262m.
These two businesses are struggling amid government regulation and increased competition. Mediclinic’s other markets are performing well. The group’s South African and Middle East operations reported revenue growth of 5% for the first six months of the company’s financial year.
Because the company operates in a relatively defensive market, I think it should be able to overcome its problems over the medium term. Analysts are already expecting a recovery for fiscal 2020. They are forecasting earnings per share of 31p, up from a loss in fiscal 2018. This estimate puts the stock on a forward PE of 11.4, which in my opinion gives a healthy margin of safety for investors buying at this level. There’s also a dividend yield of 2.3% on offer.
