Investec premium is gone

Given a clean slate, one wonders if Investec (INVP) would part ways with Ninety One (N91) again.

On the plus side, the Anglo-South African lender’s decision to retain a 25 per cent stake in its former asset management arm had a positive impact on both fair value movements and off-loan book income in the six months to September. Whittled down to its core banking and wealth management divisions, the group is also a simpler beast.

Yet the push toward simplification has ended up raising the cost of equity and helped slash the group’s market valuation. Having traded at a premium to its one-year forecast tangible book value right up until the demerger-pandemic double-whammy, the stock now mirrors Barclays’ (BARC) 50 per cent discount.

Nor is there much sign of the split’s capital-boosting credentials. Ninety One has emerged as a cash-backed, asset-light business, while Investec plc can point to a 10.7 per cent common equity tier-one (CET1) capital ratio. That might be ahead of regulatory and board-approved minima, but it is far short of peers.

Nonetheless, chief executive Fani Titi says he is “encouraged by the resilience of [the] loan book,” and has concluded that investors might jump at the first proper Prudential Regulatory Authority-baiting dividend. The market shrugged at the move and a 10.4 per cent increase in tangible net asset value per share in the period.

Analysts expect the group’s net interest margin to bottom this year at 1.73 per cent, before rising to 1.84 per cent in two years’ time. The dual focus on South Africa and the UK dampens prospects for a dramatic recovery, even with the shares in deep value territory. Hold.

Last IC view: Hold, 155.5p, 21 May 2020