Predictably, South African-focused asset manager and specialist bank Investec (INVP) has been hit by the rand's weakness, but with the underlying business performing well and currency pressures starting to abate, this could prove an excellent time to buy. Even after taking account of the currency hit, underlying pre-tax profit grew by a reasonable 6 per cent in the year to the end of March, and the shares are both undemandingly rated and offer an attractive yield. With management continuing to focus Investec onto its better-performing core operations, expect the shares to re-rate.
- Delivering solid growth
- Rapidly improving credit quality
- Exiting non-core operations
- Reasonable dividend yield
- Hit by rand weakness
- South African economy remains fairly weak
Admittedly, currency weakness is no small issue. At present Investec generates around two-thirds of profits in South Africa and the weak rand - it slumped around 20 per cent against sterling in the year to the end of March - significantly offset underlying earnings growth. Near-term prospects for the currency don't look good, either. Immediate pressures reflect poor sentiment as the country's platinum miners continue their bitter strike. The impact on emerging markets currencies from US plans to 'taper' its quantitative easing programme is another factor.
But matters may not be as grim as they first appear. Investec's managing director Bernard Kantor told Investors Chronicle that he thought the rand had been "oversold". Provided the government makes the right policy decisions, he even sees scope for the currency to "pull back quite significantly" - perhaps to around ZAr16 to the pound (from ZAr17.6 at present). If so, that would significantly relieve earnings pressures. Even if the rand just stopped depreciating, analysts at broker Numis Securities are looking forward to a "stronger year this year".
Besides, the focus on the rand obscures an otherwise decent South African growth story. Admittedly, compared with other emerging markets, South Africa is hardly booming. But even after downgrades in April, the IMF still expects the South African economy to grow by 2.3 per cent in 2014 and by 2.7 per cent in 2015. In rand terms, Investec's specialist banking business grew operating profit by over 29 per cent in the year to the end of March, reflecting strong growth in fee and commission income. Credit quality looks good, too, and impairments in the South African book fell to a mere 0.42 per cent of advances (from 0.61 per cent). Add in decently performing asset management and wealth management operations and South Africa delivered a 25 per cent operating profit hike (in rand terms) for Investec last year.
INVESTEC (INVP) | ||||
|---|---|---|---|---|
| ORD PRICE: | 513.5p | MARKET VALUE: | £4.58bn† | |
| TOUCH: | 513.5-514.5p | 12-MONTH HIGH: | 538p | LOW: 366p |
| FORWARD DIVIDEND YIELD: | 4.7% | FORWARD PE RATIO: | 11 | |
| NET ASSET VALUE: | 400p† | |||
| Year to 31 Mar | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|
| 2012 | 348 | 30.1 | 17.0 |
| 2013 | 429 | 34.0 | 18.0 |
| 2014 | 452 | 38.0 | 19.0 |
| 2015* | 507 | 38.1 | 22.0 |
| 2016* | 564 | 42.4 | 24.0 |
| % change | +11 | +11 | +9 |
Normal market size: 5,000 Matched bargain trading Beta: 1.45 *Canaccord Genuity estimates, adjusted PTP and EPS figures †Reflects UK and South African listed entities | |||
Investec isn't just a South African story, either - it generates over 30 per cent of earnings in the UK. The UK bank's performance mirrored that seen in South Africa: operating profit jumped nearly 30 per cent in the year to the end of March, helped by a significant decline in impairments and strong growth in professional mortgages and asset finance loans. Overall, UK operating profit rose by over 24 per cent last year. Going forward, Mr Kantor expects the earnings mix to shift towards the UK so that around 40 per cent of earnings are generated here.
Progress is also being made with ditching non-core operations in a bid, explains Mr Kantor, to make Investec "more agile". In April, for example, the company announced the disposal of its sub-scale Australian banking unit for a hefty twice book value. And last year Investec said it was planning to sell Kensington, the UK intermediary mortgage business that it acquired just before the financial crisis struck. Given currently strong demand for bank assets, Kensington could fetch a high price, too.
Disposal proceeds will be reinvested in growth areas and Numis expects to see "a combination of a higher ROE [return on equity] with a stronger capital base". Investec is making progress with both. The ROE rose from 9.4 per cent in 2013 to 10.1 per cent this year and management is targeting a return of around 12 per cent. Management also expects Investec's Basel III-basis equity tier-one capital ratio to exceed 10 per cent by March 2016, leaving it almost as well capitalised as big global lenders such as HSBC (HSBA).
