Investec Plc – Resilient business performance despite having volatile financial markets.

Investec Plc (LON: INVP) is a FTSE 250 listed company, providing a range of financial products and services in several markets.

Investment Highlights - Investec Plc – Buy at GBX 188.95

• The Company has shown significant growth in its client franchises, and the third-party FUM has increased by 15.5% to £52.0 billion during H1 FY21
• Despite the challenging business environment, NAV per share of the Company during H1 FY21 ended on 30 September is higher than the levels of FY20 (433.5 pence vs. 414.3 pence).
• The Company has substantial capital and leverage ratios of 11.6% and 7.0%, respectively and remained ahead of internal minimum targets.
• As per the valuations metrics, EV/Sales, Price/Book & Price/Earnings multiples of Investec Plc are currently lower as compared to corresponding multiples of the financial services industry, indicating the stock has upside potential in the near term.
• From a technical standpoint, the stock is trading higher than 20-day and 50-day simple moving average price, which indicates an uptrend of the stock.

Key Risks

• The ongoing Covid-19 pandemic may disrupt the business performance of their investments in the near-term.
• Covid-19 pandemic might harm the financial services industry as it may reduce the FUM and subscription base of the Company.
• The increased market volatility in the financial markets could harm the liquidity and solvency of the Company.

Recent news

The Board has appointed Richard John Wainwright as an executive director and Stephen Koseff as a non-independent non-executive director of the Company. The effective date of appointment is 17 September 2020.

Financial Highlights (for the six months ended on 30 September 2020 as on 19 November 2020)

(Source: Company result)

• The Company had demonstrated a revenue decline of 24.0% during H1 FY21 to £729 million whereas adjusted operating profit before tax went down by 48.4% to £142.5 million.
• The Company has reported an adjusted basic EPS of 11.2 pence in H1 FY21, which is 50% lower than the levels of H1 FY20 due to demerger of asset management business in March 2020.
• Return on equity and return on tangible equity was 5.3% and 5.8%, respectively during H1 FY21.

(Source: Company result)

• Core loans and advances have increased by 1.0% to £25.2 billion as of 30 September 2020 in comparison to £24.9 billion as of 31 March 2020.
• The Wealth and Investment segment of the Company is having positive net inflows of £336 million.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price to Earning Approach (NTM) (Illustrative)

Conclusion

The Company has shown moderate growth in FUM and maintained positive net inflows despite having reduced economic activity and increased market volatility. The Company is well-positioned, reflected by a robust cash balance of £12.9 billion as of 30 September 2020, which accounts for 39.5% of total customer deposits. The strategic objective of the Company is to have controlled costs under challenging trading conditions. The Company is expecting the financial performance of H2 FY21 to remain better than its first half.

With regards to Valuation, the Company is undervalued and trading at a relatively lower P/E, P/B and EV/Sales than the corresponding average multiples of the financial services industry. On the technical front, the Company is trading higher than 20-day and 50-day simple moving averages indicating the upside potential of the stock. The stock made a 52-week low and high of GBX 122.55 and GBX 361.10, respectively.

Based on the decent business performance and support from the valuation as done using the above method, we have given the “Buy” stance on Investec Plc at the current market price of GBX 188.95 (as on 20 November 2020 before the market close at 1:30 PM GMT), with lower double-digit upside potential based on 9.00x Price/NTM Earnings (approx.) on FY21 earnings per share (approx.).

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

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