Investec (INVP) the Anglo South African investment group looks good value in a neglected / misunderstood / contrarian kind of way. So what I hear you say why won’t it stay that way? Good question and it may do for all I know. They do however seem to be trying to do something about it by proposing the de-merger of their Asset Management division which incidentally manages £121bn - bet you didn’t know that. That’s before you factor in the £50bn+ that they manage on the private client / wealth mangement side of things. Any way to cut a long story short I have been researching the demerger document and other stuff they have put out on their Investor relations website and I have to say I’m quite taken by it and think it could be quite undervalued, although as I said at the outset I guess it could just remain that way.
Nevertheless as it currently stands it does look pretty good value on around 7.7x earnings with a 5.7% dividend yield which is more than two times covered. The balance sheet also appears to have net cash of around £1.6bn at the interim stage as they have taken in more deposits than the loans they have made. Their lending also seems to be reasonably prudent as the loan losses are pretty low & it is not overly leveraged. They also stand on a price to book value of around 1x with an ROE of 10% or so which seems fair enough for a bank, although they have ambitions to push this up towards mid-teens in the next few years which could argue for a re-rating if they achieve it. So all in all it ticks a lot of value boxes (which I know is a dirty word these days) although it does lack momentum, certainly in price terms, but has had some earnings upgrades more recently.
A look at the sum of the parts is also quite interesting and is I think another potential indicator of some value being on offer here in addition to the above traditional metrics. Firstly there is the Asset Management arm which is being spun off and existing Investec shareholders will end up owning 70% of it given the 10% new stock being issued and the 20% held by employees. In the documents relating to this they seem to be assuming a £1.9bn valuation for this, which seems reasonable given the £121bn of assets they manage, the 30%+ operating margin and the decent growth in assets that they have demonstrated over the last decade. So if we go with a round £2bn 70% of that would be £1.4bn versus the current EV of £2.79bn - so about half of that.
Next they will still have the Wealth and Investment Arm which manages as much as Brewins in the UK plus higher margin assets in South Africa. So that’s probably another £1bn of value there based on Brewins market cap. They also have the broking arm within this which probably compares favourably to the likes of Numis etc. so that probably worth another £0.6bn or so, based on Numis's market cap. So that puts us up to about £3bn already.
Then that leaves the deposit taking and lending that they do, although some of that is undertaken by the Wealth and Investment arm so it is a bit tricky to work out how much of the book value one should ascribe to that. It seems though that 40% of the lending is to HNW’s & other private client lending. So to avoid double counting I’ll ascribe 60% of the book value to the Corporate/other and property related lending. So 60% of £4.6bn comes out at £2.76bn so I could use that, but I note in their group summary this year they detail allocating £3.6bn of capital combined to the SA & UK Banks. So I will probably use that as the base for the banking sum of the parts. Total that up and you get:
Asset Management = £1.4bn
Wealth Management = £1bn
Broking Arm =£0.6bn
Banking Assets £3.6
Total = £6.6bn & an Enterprise Value (EV) of £5bn
This compares to a current market cap of £4.4bn & EV of £2.8bn. Which based on the above rough and ready sum of the parts might suggest that it could be 50% or more undervalued.
Now lets look at the share price chart and earnings history to see if that seems reasonable or even possible. Over 10 years since the end of 2009 the shares have largely gone sideways with a couple of peaks along the way in the 630p region versus the current 440p or so. This would give upside of about 43% if they can make it back up to those kind of levels or equivalent once they split.
While over the same time frame the earnings have meandered their way up from about 43p to 53.6p last year which a fairly dull 2.2% per annum. While the dividend has done a bit better going from 13p to 24.5p or a fairly decent 6.5% per annum, although this did reflect bouncing back from a reduced dividend in 2009 when it was cut from 25p - so you could say no growth from there over 11 years or 12 years as the forecast for to March 2020 is only for 24.6p. If it did get back to say 630p that would equate to 11.75x & a 3.9% yield which doesn’t seem out of the realms of possibility to me. However, I have to say it is a bit disappointing on the earnings and dividend front so maybe the flat price over the piece is not so surprising? It does mean though that it has been de-rated as the earnings and dividends have progressed and the price has trended sideways and obviously the market did see fit to rate it more highly on a couple of occasions along the way.
Summary & Conclusion
So it does look potentially interesting value based on the ratings and my rough sum of the parts for what they are worth, but at least there seems to be a catalyst coming with the asset management de-merger due in March to close some of the undervaluation perhaps? Alternatively the market could continue to ignore it and some holders may be too lazy to do the work and just think oh I’ll ditch it before the de-merger, especially if they are worried about markets etc. Which could even throw up an even better buying opportunity closer to the bottom end of the range in recent years in the low 400’s perhaps? Nevertheless I've decided to take a ride on this Zebra rather than a Unicorn with little in the way of earnings, dividend or assets - but each to their own. As it scored well on the Compound Income Scores it also entered the Compound Income Portfolio after this months screening. See the highlighted links for more details on those.
January proved to be a little less favourable than December as the Corona virus took the shine off of an otherwise positive start to the year. There is an old saying that as January goes so goes the year. So it is therefore a bit disappointing / worrying perhaps that as a result of the virus related concerns most global equity markets provided negative returns in January. The exception to this was the Tech heavy Nasdaq which still managed a further rise as investors and index funds presumably continued to buy in despite the high gains / ratings already seen there - momentum in action I guess.
Compound Income Portfolio
Against a 3.25% negative return for the FTSE All Share Index in January, the Compound Income Scores Portfolio managed a 0.76% positive return for a 4% relative out performance for the month. This is a good way to start the year , but early days yet given the volatile market so far. Since inception nearly five years ago this leave the CI Portfolio up by 104% versus the total return of 32% from the FTSE All Share. You can see the full performance history here if you are interested in that.
The performance this month was helped by the two largest holdings in the portfolio both posting decent gains of 19.4% & 9.3% on the back of positive trading updates. At the other end of the scale there was one painful performer which fell by 24.6% although it was one of the smallest positions in the fund as it had warned last year too.
This one finally exited at this months screening on the back of its deteriorating score along with two other poorer scoring stocks with mixed looking outlooks that had small market caps. These were replaced by two larger stocks, one a reasonable quality play, if a little dull, which is popular with private investors I think, although it had suffered from fears over the virus scare in China. While the other is I think a terrific contrarian value play with an upcoming catalyst. It scores well and trades on around 7x with a near 6% yield which is more than 2x covered. It also has cash on the balance sheet and trades at around book value.
Subscribers can see full details of these trades in their Scores sheet in the transactions tab, but if you are not familiar with the Scores and think you might like to gain access then you can find out more about them for just and how to sign up by clicking here.
Market Timing Indicators
Despite the fall in indices this month these all remained in positive territory with the Mid & Small Cap indices being in a much more bullish trend thanks to the post BREXIT-Election boost. Interestingly the US Manufacturing ISM has also just bounced back above 50 suggesting that there was something of a recovery in sentiment going on post the China trade deal, although this may now ironically be snuffed out by the China virus.
Summary & Conclusion
So a disappointing start to the year which might be worrying given the old saying of "as January goes so goes the year." In any event I guess it may not be too surprising given the euphoria we saw as we came into the year and the complacency that seemed to be around despite the stretched ratings in the US. Aside from that Emerging markets and the UK are generally seen as better value and therefore less exposed, but the threat from the Corona virus and BREXIT may diminish those attractions in the short term I guess. Meanwhile investors continue to chase the likes of Tesla to an ever higher (dare I say ridiculous) rating.
I would assume that neither of those worries will be as bad a feared and as the timing indicators and other economic statistics are still suggesting to stay invested, in the absence of a more serious economic down turn in the US appearing, the CIS Portfolio will remain fully invested as a result bar a little residual cash. Given the value on offer in the UK market that it focuses on I'm comfortable with this & would like to think that the Scores will continue to add value in the months ahead. Good luck with your investing in the months ahead too and mind how you go.
So another year over and a new one just begun...as the Christmas music fades for another year it is now time I got around to writing up a year end review, so here goes.
Compound Income Scores Portfolio (CISP)
This is the portfolio I have been running to test / demonstrate the effectiveness of the Scores in identifying promising income shares with which to grow and compound my income and net worth. The chart above (which is also available on the portfolio in the site menu) shows how this has done over the 4.75 years since inception against the main UK Indices.
It demonstrates over that period that my use of the Scores has been quite effective in helping me to pick some decent shares. This has led to the portfolio doubling over the period with a total return of 102.4% or 16.03% per annum which has far outpaced the FTSE All Share which I use as a benchmark, which has provided total returns of 36.15% or 6.72% per annum.
Since I like to tilt towards better performing Mid & Smaller stocks and the Scores & the use of a broadly equally weighted portfolio help me to do this, I include the Mid and Smaller Indices for a broader comparison. It is worth noting that the Scores also help me to assess some attractive income and growth stocks which are listed on AIM (yes there are some). I haven't managed to find a source for total returns on AIM although the FTSE AIM 100 for example is up by about 55% in capital terms over this period so being able to fish from that broader pool of stocks has probably helped too, assuming I catch some good ones. So don't forget if you would like to access the Scores and see what is in the CISP then you can find out how you can do so in the Scores tab in the site navigation panel.
As for 2019, in common with many other investors I've seen out there it was a pretty good year for the CISP with a total return of +31.12% versus the +19.16% from the FTSE All Share. This is a great outcome in a year which seemed quite difficult and dangerous in the main for investors, but by keeping calm and carrying on it was able to deliver some great returns in a year quite frankly when nearly everything went up in the end, probably against prior fears.
So I won't be getting too carried away or letting that short term success go to my head as this is a long term game and I'm using a fairly "mechanical" monthly screening process, with a common sense overlay, to select the portfolio. I have to say with the outcome of the election in the UK and the expected signing of a US / China stage one trade deal this month the background seems to be a lot more helpful than seemed likely when we went through the second half of last year.
That being said though I'm sure as it is an election year in the US we will no doubt get some more surprising tweets from Donald Trump and as I write the Middle East has just flared up again. So no doubt we will have plenty of "events" to look forward to and keep us on our toes. I think the jury is still out on whether we will see a recession or if we have just passed though a mid cycle slowdown in an extended cycle thanks to low rates & QE etc. and soon to come government spending. Markets certainly seemed to be discounting this and celebrating it toward the end of last year so if that doesn't come to pass then we could be in for a rough ride again.
Market Timing Indicators.
Which brings me nicely onto a quick update on these which I keep for the UK market along side other economic indicators which might indicate an approaching turn in the cycle / recession. One of these, the yield curve, inverted last year ( remember that?) and this has usually preceded a US recession by around a year to 18 months. Nevertheless the timing indicators remained in and pushed further into positive territory in December. Thus these are again suggesting that we should remain calm and carry on investing, although as ever with an eye on news flow and "events" but without getting to panicked. As one wise old stock broker always used to say to me "Nothing is ever as good or as bad as it seems."
So with that in mind I'm going to carry on compounding for now as market timing is generally difficult to do effectively. I'm sure many found that last year when they ran to cash against the worrying background, only for markets to confound those fears making it difficult and expensive to get back in again. Which I guess begs the question why bother with the timing indicators and certainly if you are just starting out or are at the younger end of the spectrum it may not be.
In my case having been Compounding for 30 years now and being in the middle of the Spectrum I can still (just about) take a longer term view, but also might like to protect some of my gains if things should obviously cut up rough as this is what 30 years of Compounding at 16%+ per annum looks like from an indexed base of 100.
November turned out well for investors with a few potentially positive developments and consequently positive returns from equity markets around the world. Firstly there seemed to be some positive developments towards a scaling back of the US / China Trade War, although this was subsequently delayed.
Meanwhile in poor neglected UK there were some hopes of a BREXIT deal being done which then led onto the announcement of a General Election. Now while this introduces another layer of uncertainty into an already cloudy outlook, at least there were some positive looking polls for the Tories. This has led some to believe that they might be able to get a working majority and thereby "Get BREXIT done" as their campaign slogan says.
The upshot of this for the under owned UK market & the more domestic focused sectors found in the Mid Cap and Small Cap sectors, was that they enjoyed stronger gains than the rest of the market and the larger more internationally exposed blue chips as the pound also rallied a little on election / BREXIT resolution hopes. In terms of the UK Market timing signals that I calculate, given the positive returns across the board all the main indices are still above their moving averages signalling that one should remain invested.
Given the news flow and the moves seen in the Mid and Smaller Cap parts of the market these are more bullishly placed than the broader indices. This also helped the Compound Income Scores Portfolio (CISP) to a strong month - see the highlighted links for more details.
In summary the CISP returned 6.5% in the month versus the 2.2% from the FTSE All Share. For the year to date this leaves it with a total return of 21.4% versus 15.3% for the index.
On doing the screening for potential sales and replacements this month proved to be less positive. As the few names that were potential sales looked a bit marginal and I'm inclined to give them the benefit of the doubt for now given the forthcoming General Election and the likely winding down thereafter for Christmas. In addition I struggled to find many attractive looking alternatives that were not already highly rated. So I'll look to do more of a refresh in the New Year.
Talking of which that's probably it from me on here for this year, unless I get any good ideas or have any thoughts I wish to express post the election outcome. But barring that may I take this early opportunity to send Seasons Greetings and I hope that the markets are positive for you too in the next month and next year too for that matter,
Further to the last post about the possible benefits of Investment Trusts I see or rather heard the FT Money Show Podcast is talking about this too this week. The episode covers Family Trust where wealthy families like the Rothchilds hold a large stake so you can invest along side them. Coincidentally it also covers the Dividend Heroes and also the benefits of the IT structure and independent boards etc.
Along the way it also touches on investing for income and see the closed end structure as an ideal way to do this via alternative assets like property and infrastructure or Green energy etc. They did mention though that many of these (like the Green energy funds) stand on big premiums. If that sounds of interest you can listen to it here.
With premiums and discounts in mind I did notice some results from an interesting looking Property REIT yesterday, called Residential Secure income (RESI) which in common with many other REIT's is standing on a discount, around 15% in this case and offering a decent yield of around 5.4% with the price at 92p and the NAV having moved up to about 108p from launch. Unusually it invests, as its name suggests, in Residential Property let to Housing Associations, part rent part buy owners and in the main Retired folk. They are just about fully invested after coming to the market just over two years ago and are now paying their target dividend of 5p which they hope to grow in real terms over time and achieve an 8% total return. So while overall it may not be that exciting and could I guess go to a bigger discount it does seem like a reasonably attractive way of becoming a social landlord without all the hassle.
While housing is quite a battle ground in the election presumably this type of operation could face some political or regulatory threat or opportunities depending on the shape of the next government. So maybe dull and not without it's risks but seems an interesting play on residential property and the housing shortage at the affordable end at a discount with a decent and potentially index linked yield, unless I'm missing something.