Profit from the RBS deal machine

Diamonds add sparkle to Signet prospects; Oil drama makes Telecom Plus one to watch

The current Royal Bank of Scotland is a very impressive achievement, a monster of a deal-machine which has been transformed from a parochial bank to a global player. From the takeover of NatWest to the recently consummated £6bn deal with Charter One in the US, Fred 'The Shred' Goodwin, the cost-cutting chief executive - has earned as good a reputation for adding the right businesses as for ripping costs out of the acquired companies. RBS is Britain's biggest credit card lender and one of the top 10 banks in the US, too.

The current Royal Bank of Scotland is a very impressive achievement, a monster of a deal-machine which has been transformed from a parochial bank to a global player. From the takeover of NatWest to the recently consummated £6bn deal with Charter One in the US, Fred 'The Shred' Goodwin, the cost-cutting chief executive - has earned as good a reputation for adding the right businesses as for ripping costs out of the acquired companies. RBS is Britain's biggest credit card lender and one of the top 10 banks in the US, too.

The purchase of Charter One has gone down well with the City, which has compared the price RBS has paid favourably with other deals in the US. The expectation is that Mr Goodwin will be able to transfer the winning formula he has employed at his other New England bank, Citizens, across to the new company. The deal is awaiting regulatory approval and is expected to close by the end of the year.

Such a mammoth purchase has been made possible by the formidable profits being thrown off by the UK operations, with the high street bank at its core. RBS was one of the first to realise competition for customers would be fought over quality of service, and has led the drive to improve service in branches. Profits have been bolstered by financial markets business, too.

Observers believe RBS will be a half-US bank in a few years, but the risk is always that it will be tempted into a "deal too far". There could also be concerns over Mr Goodwin's dictatorial style if anything does go wrong. But the risks look small compared with the rewards Mr Goodwin is reaping for his shareholders.

RBS's trading update yesterday was taken badly because of the impact of the weak dollar on Citizens earnings, and because of the vague hope that RBS might have said profits will rise by more this year than the 10 per cent already expected by the market. These are small niggles, compared with the big picture of an ambitious group, well run and undervalued. Buy.

Diamonds add sparkle to Signet prospects

Signet, the jewellery retailer formerly known as Ratners, narrowly missed out on a return to the FTSE 100 this week, but that ought to make little difference to the sparkling prospects for the shares.

Despite having almost 70 per cent of its business in the US, where it trades as Kay Jewelers and Jared, it has been able to shrug off the collapsing value of the dollar. Yesterday it reported that profits before tax in the first three months of its financial year were £28.1m, up 17 per cent on the same period last year. If the dollar had stayed where it was, the increase would have been 33 per cent.

Signet is expanding fast, increasing selling space in the US by 6 to 8 per cent a year. Diamonds are its best friend, accounting for 70 per cent of US sales, so the challenge there is to get customers to go for higher-price rocks. In the UK, it is simply to get women buying as many diamonds as their US sisters. The trends are good, with gems increasingly seen as work-outfit accessories, not just going-out wear.

The rising price of gold took some of the lustre off yesterday's results, but Signet has now been able to pass this cost on to customers. The competitive environment doesn't look too tough, with rising US employment and growing confidence in the economy. The UK, where interest rates are on the up, may not stay so robust but the company is cutting administrative costs here. The shares, at 115.25p, are a buy.

Oil drama makes Telecom Plus one to watch

Telecom Plus, the home utilities supplier, yesterday delivered a strong set of annual results. Charles Wigoder, the chief executive who sold Peoples Phone to Vodafone in 1996 for £77m, is now supplying fixed and mobile telephone services, electricity, gas and internet services to homes.

The gas business is loss-making because of high wholesale fuel prices affecting gross margins, but as a whole the company is storming away, with sales up 41 per cent at £81.8m and pre-tax profits ahead 90 per cent at £10.6m.

So, are Telecom Plus shares - down 6.5p yesterday at 317.5p - good value? They are trading on a price-earnings ratio of 25 times, falling to 20 next year and 17 times for 2006. They seem attractive, given the high growth.

Telecom Plus has defensive qualities as well. This year it has paid 10p per share in dividends, amounting to £4.7m, nearly double last year's £2.9m payout. This comes from the company's stronger net cash flow.

The worry remains energy prices. Wholesale gas prices are linked strongly to the oil price. The company is hedged until September, meaning its gas-related performance in the second half of the year is uncertain. A lot depends on how far Telecom Plus will raise retail prices to protect its margins. Fluctuating energy prices should not deter investors long term but it seems sensible to wait a while and see how oil prices pan out.