Investec Plc - Strong Balance Sheet with Robust Capital and Liquidity Levels

Investec Plc (LON: INVP) is a FTSE 250 listed specialist bank and asset manager. It serves a selective client base with various financial services and products.

On 6^th August 2020, the Company will hold its Annual General Meeting (AGM).

Recent News
On 4^th June 2020, Investec Plc and Investec Ltd announced that David van der Walt had step down from the Group’s Board as an executive director ahead of his retirement from the Investec Group at the end of 2020. David was replaced by Richard Wainwright.

Financial Highlights (FY2020)

(Source: Company Website)

On 21^st May 2020, the Group provided the full-year results for the year to 31^st March 2020, showing a drop in the profit. The Group reported a reduction in the net asset value to 414.3 pence as at 31^st March 2020 from 434.1 pence the year before. Led by COVID-19 disruption, the adjusted operating profit declined by 16.8 per cent to GBP 608.9 million in FY20 from GBP 731.9 million in FY19. Further, INVP has decided not to declare a final dividend, resulting in a full-year dividend per share of 11 pence (2019: 24.5 pence paid).

Share Price Performance

1-Year Chart as at June-22-2020, before the market close (Source: Refinitiv, Thomson Reuters)

Investec Plc’s shares were trading at GBX 170.00 on 22^nd June 2020 (before the market close at 8:15 AM GMT+1), down by 0.15% against the last day closing price. Stock 52 weeks High and Low are GBX 407.22/GBX 122.55.

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology
 

Growth Catalysts and Risk Assessments
The Group said customer deposits increased by 2.9 per cent year-on-year to GBP 32.2 billion, with interest income rising from GBP 2.63 billion to GBP 2.70 billion. Investec witnessed a strong balance sheet, with robust capital and liquidity levels. In the latest update, the financial decline was primarily brought by the weak macroeconomic factors such as Brexit and geo-political tensions.

Conclusion
The outlook seems to be cautious in the short-term but building growth for the long-term.The Group remains focus on controlling costs and improving efficiencies.  Moreover, the Group entered the financial year 2021 with a robust capital position and further plan to maintain a decent level of liquidity. The Group continuously monitoring and managing oversight of the loan portfolio with ongoing stress testing, scenario modelling and client engagement to mitigate emerging risks.

Based on the decent prospects, and supported by valuation done using the above method, we have given a “BUY” recommendation at the current price of GBX 165.35 (as on 22nd June 2020, before the market close at 8:10 AM GMT+1) with lower double-digit upside potential based on 0.45x NTM Price/Book Value (approx.) on FY21E Book Value Per Share (approx.).
 
Burford Capital Ltd (LON: BUR) – Growing Trends in Litigation Financing Holds Upside Potential

Burford Capital Ltd is FTSE AIM 100 listed Company, which provides investment capital, investment management, financing, and risk solutions with a focus on the litigation and arbitration sector.

Recent News
15^th May 2020: As per the latest update from the high court, the court did not decide if market manipulation had occurred. Therefore, the Company dropped its legal pursuit.

Financial Highlights (for the year ended 31 December 2019) – USD Million
As on 28^th April 2020, the Company released its full-year results for FY19. During the FY19, the total commitments stood at $1.6 billion, which would drive future deployments, realisations, and income. In 2019, the Company generated over $1.0 billion in cash with $518 million on its balance sheet. In balance sheet core litigation finance portfolio, the return on invested capital for FY19 surged to 93% from 85%. In FY19, the total income decreased by 15% to $357 million as compared with the previous year (2018: $420 million). In FY2019, the adjusted operating profit was decreased by 21% to $279 million. The operating margin stood at 78% and profit after tax was reported at $226 million in FY19. On 31st December 2019, the total assets under management stood at $2.9 billion.

Share Price Performance
 
Daily Chart as of 22^nd June 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Burford Capital Ltd’s shares were trading at GBX 524.80 before the market close on 22^nd June 2020 and were up by 4.46% versus the previous day closing price. Stock 52 weeks High and Low are GBX 1,795.00/GBX 250.43.

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology


Valuation Metrics

(Source: LSE)

As on 29^th May 2020, Price/Earnings, EV/EBITDA and Price/Book multiples of the BUR were around 5.8x, 6.7x, and 0.8x, respectively, which were lower as compared to the industry multiples. It reflects, shares are undervalued against its peers.

Growth Catalysts
The Company reported that it achieved litigation success that would yield unrealized gains. It can potentially generate over $150 million in total income. The total portfolio also grew to $4.2 billion in FY19 as compared to $3.2 billion in FY18. Moreover, it is trading at around 72 per cent discount from its 52-week high. In FY19, return on invested income on core litigation financial portfolio surged to 93 per cent from 85 per cent. Recently, insiders (directors) have purchased shared and bond issued by the Company, which reflects the confidence in Company’s prospects.

Risk Assessments
However, due to COVID-19, the Company expects some delay in realisation of assets. Moreover, the Company’s revenue could be volatile as some large investments are made in various claims and types, which are subject to market risk. On the other hand, the short selling of Muddy Waters triggered a period of weakness and raised concerns of manipulating the market unlawfully as reported last year in August’19.

Conclusion
Overall, the fundamentals of the Company remain strong. In just 4 months to FY20, the Company achieved success in several significant cases, which would eventually generate a considerable amount of cash receipts and profits. It had shown decent financial performance in the financial year 2019. However, investor confidence remained dented. The Group is declaring a plan to seek a dual share listing in the United States, while it responded by restructuring the Board.  Further, Burford has continued to improve and increase the transparency of the disclosure. Burford Capital Ltd is continuously investing in growing its operations and is planning to expand its product offerings. The Group has received a decent start of FY20 and expecting a meaningful demand for its services. It has a significant amount of cash and capital to withstand the economic turbulence.

Based on the above rationale and the valuation done using the above methodology, we have given a “Speculative Buy” recommendation at the current price of GBX 502.40 (as on 22^nd June 2020, before the market close at 8.00 AM GMT+1) with lower double-digit upside potential, based on the 0.86x Peers NTM Price/Book Multiple (approx.) on the FY20E Book Value Per Share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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