Overview
Investec PLC (INVP) is a London, United Kingdom-headquartered specialist bank and asset manager. The group offers a range of financial products and services to a selective client base. It primarily operates in the UK and Europe, Asia-Pacific and Southern Africa, employing more than 10,000 people worldwide. While the company entered the United Kingdom in 1992, it was founded in South Africa in 1974. Through a combination of considerable organic growth and strategic acquisitions, it has expanded from a small finance company to one of the biggest international financial group trusted to manage assets worth more than £150 billion.

The company offers private banking, saving, personal investment management, lending and financing services to entrepreneurs, business professionals or high net worth individuals through onshore and offshore services. In addition to banking, investment and finance solutions, the group offers a comprehensive corporate advisory service to businesses. Its other clients include charities and friendly societies, hospitals, insurance companies, government departments and pension funds. Apart from this, depending on the objectives of the clients, the company offers professional investing, financing, lending and transactional services to its clients to deliver the best results.

Key Statistics



Demerger of The Asset Management Business

On 14 September 2018, the group announced its decision to demerge and separately list the Investec Asset Management business, and the floatation is expected to happen in the second half of 2019. This would simplify the group and support the company in the next phase of its development. The plan also heightens focus on improved cost discipline and would allow Investec Asset Management to accelerate its own growth. The spin-off is expected to be completed during the second half of 2019, subject to regulatory and shareholder approvals. The company, in its strategic review, found that there are limited synergies between Investec Asset Management business and the Specialist Banking and Wealth & Investment businesses. Thus, it seemed appropriate to the management to demerge and publicly list the asset management operations to accelerate its growth and have an enhanced ability to attract and retain investment talent. The investors took this news positively and the shares rose by more than 8% on the day of the announcement.

Management

Fani Titi is the Chairman of the group, and he was appointed in November 2011. Stephen Koseff is the Chief Executive Officer of the group. He is supported by Bernard Kantor, who is the managing director of the group.

Segments

The group’s operations are differentiated in three operating segments: Asset Management, Wealth & Investment and Specialist Banking. Asset Management division operates completely independently providing investment management services to private and public sector pension funds, financial institutions, corporates, foundations, central banks and intermediaries. Wealth & Investment division is one of the UK’s leading private client investment managers and provides private clients, charities and trusts with investment management services and independent financial planning advice. The Specialist Banking division offers lending, transactional banking, treasury and trading, advisory and investment services to high net worth and high income individuals, corporates, institutions and government.

Top Shareholders

 
(Source: Thomson Reuters)

Key Financial Highlights (FY 2019, in £m)
 
 
(Source: Company Filings)

Supported by favourable market and currency movements, assets under management as at 31 March 2019 increased by 7.3% over the year to GBP 111.4 billion. Driven by growth in net interest income and net fee and commission income, total operating income before expected credit loss/impairment losses on loans and advances grew by 1.8% over the last year to GBP 2,486.3 million. Because of strong loan book growth and an increase in base rates, net interest income increased by 7.2% to GBP 815.4 million (2018: GBP 760.4 million). Led by a good performance from the investment banking and specialist lending businesses, as well as strong annuity fees from the asset and wealth management businesses, net fee and commission income increased by 0.9% to GBP 1,373.6 million (2018: GBP 1,361.2 million). The cost to income ratio (net of non-controlling interests) amounted to 69.9% (2018: 68.3%), primarily driven by headcount growth to support business activity and higher premises costs given the prior-year rental provision release in South Africa. Supported by improved performance from the UK Specialist Banking business, good loan book growth in home currency and substantial net inflows, adjusted operating profit increased by 9.4% year-on-year to GBP 664.5 million. Adjusted earnings attributable to shareholders increased to GBP 519.3 million, up by 9.2%, while the adjusted basic earnings per share rose by 7% to 55.1 pence. Shareholders equity decreased by 2.8% to GBP 4.3 billion, while net tangible asset value per share decreased by 3.9% to 386.0 pence and net asset value per share decreased by 4.1% to 434.1 pence. Amounting to 42.4% of customer deposits, cash and near cash balances as at 31 March 2019 was GBP 13.3 billion.

Financial Ratios


(Source: Thomson Reuters)

The company in the latest financial year reported a lower efficiency ratio than its peers, but the ratio has gradually increased over the years. While the contraction in loan growth was more, the deposit growth was better than the industry. The company is more leveraged than its peers and reported a lower return on assets.  Pre-tax return on assets stood at 1.2 per cent in FY19 as compared to the industry peers of 2.8 per cent.

Valuation Methodology
Method 1:Price/Book Value Multiple Approach (NTM)


To compare INVP with its peers, P/B multiple has been used. The peers are Lloyds Banking Group PLC(NTM P/B was 0.89), Standard Life Aberdeen PLC(NTM P/B was 0.97),Provident Financial PLC(NTM P/B was 1.31), Nedbank Group Ltd(NTM P/B was 1.35) and Absa Group Ltd(NTM P/B was 1.37) The mean of P/B (NTM) of the company’s peers was 1.18x (approx.).

Method 2:Price/Earnings Multiple Approach (NTM)


*All forecasted figures and Peer information have been taken from Thomson Reuters.

To compare INVP with its peers, P/E multiple has been used. The peers are Rothschild & Co (NTM P/E was 7.50), Absa Group Ltd(NTM P/E was 8.35),Nedbank Group Ltd(NTM P/E was 8.52), Standard Bank Group Ltd(NTM P/E was 10.25), Rmb Holdings Ltd(NTM P/E was 11.98), FirstRand Ltd(NTM P/E was 12.60) and Capitec Bank Holdings Ltd(NTM P/E was 22.72) The median of P/E (NTM) of the company’s peers was 10.25x (approx.).

Share Price Commentary

 
Daily Chart as at July-01-19, before the market closed (Source: Thomson Reuters)

On 1 July 2019, at the time of writing (before the market closed, at 1:05 pm GMT), INVP shares were trading at GBX 522.2, up by 2.19 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 577.00/GBX 420.00. The company's stock beta was 0.18,reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £5.29 billion, with a dividend yield of 4.79 per cent.

Growth Prospects and Risks Assessment
Against a challenging operating environment with weak economic growth in both South Africa and the UK, the company delivered a sound operational performance, with return on equity improving from 12.2% to 12.9%. With an aim to enhance integrate digital capabilities into the core business, the company has focused on the further development of its technology platforms. Enhanced returns during challenging economic conditions have been achieved through the inclusion of alternative assets in portfolios, going beyond traditional investments. The company continues to have a positive view on the outlook for growth in the global economy and is focused on building a long-term intergenerational business, with substantial opportunity for growth in the industry over the next five to ten years. However, investors have been unsettled by potential geopolitical risks, but the company is prepared for it.

Conclusion
The company is well prepared to navigate through these various challenges through its research and investment expertise and the momentum is positive with good future as an independent, pure-play asset manager.
 
Based on the decent prospects and supported by valuation done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 511 (as on 28 June 2019) with single high-digit upside potential based on 1.18x NTM Price/Book Value (approx.) on FY20E book value per share (approx.) and 10.25x NTM Price/Earnings Value (approx.) on FY20E earnings per share (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on July-01-19).

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.