Royal Dutch Shell (LSE: RDSB) (or just Shell after its planned name change) is currently the largest company in the FTSE 100 index. Its market value is £128bn, which makes it one of the world’s largest oil and gas companies. I’m considering buying Shell shares today after an activist investor took a stake in the firm. It thinks there might be hidden value in Shell that the market isn’t recognising.
Let’s take a look at what’s going on.
An activist investor
As a quick recap, an activist investor is a person, or investment company, that buys a large stake in a public company to influence how it’s being run. Usually this is because they see hidden value in the company that is being mispriced by the market.
The activist investor here is Third Point. It bought a position in Shell this year as it sees “opportunity for improvement across the board”.
Triple Point expects Shell’s liquified natural gas (LNG) business, together with its Renewables and Marketing businesses, will generate EBITDA (earnings before interest, tax, depreciation and amortisation) of over $25bn in 2022. This would account for 40% of Shell’s EBITDA in this year.
Moreover, Triple Point views this amount of EBITDA as likely to support the whole value of the group as it stands today. This is due to the growth prospects of these businesses, and the fact that Shell shares today look cheap.
Triple Point believes Shell should spin off its LNG, Renewables and Marketing businesses to allow it to invest aggressively in decarbonisation strategies. This would leave its legacy oil and gas business to prioritise returning cash to shareholders.
I view Triple Point’s strategy as promising. It’s not unknown for the market to misprice a business. I wrote about Intel’s Mobileye spin-off recently that also appeared to be undervalued by the market.
But before I consider buying Shell shares, I need to understand the current prospects of the whole business, including its legacy oil and gas division. This is because the demerger of the LNG, Renewables and Marketing ops might not happen.
The firm’s revenue is set to grow by 42% in 2021, and is estimated to increase again in 2022, by 11%. Earnings are expected to grow too, by over 300% in 2021, and 29% in 2022. However, it’s important to note that revenue and profits fell considerably in 2020 due to the disruption caused by the pandemic.
The valuation for Shell today based on a forward price-to-earnings (P/E) ratio is 7. This is dirt-cheap in my view. The forecast for the dividend yield is also respectable at 4.4%.
Are Shell shares a buy?
I like the potential here. If the demerger of the company’s LNG and Renewables businesses happens as outlined by Triple Point, then it would unlock a lot of value.
I have to keep in mind that this may not happen. It’s a risk to consider before I buy the shares. On balance, though, I think Shell shares are a buy for my portfolio.
The post Should I buy Shell shares now an activist investor says there’s hidden value? appeared first on The Motley Fool UK.
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Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.