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.
The corny title refers to one of my long standing holdings which has delivered excellent returns for me over the years. As I have written before it is one of those family run businesses which Lord Lee is fond of backing and indeed I think he has been in this one in the past. Any way I digress, but the stock concerned is S & U Plc which is now a £240 million market cap. car loan company which also has a fledgling bridging loan operation. So why mention it today? Well they have their AGM today and have put out a trading update statement ahead of that.
This confirmed continued strong trading despite what the share price might have been suggesting. If that is of interest you can read the announcement and learn more about S&U at their investor relations website. Here you'll also find links to some Proactive Investor Interviews with Anthony Coombs, chairman of S & U. I thought the last one, which you can view here if your want, was interesting as he seemed to be pretty confident about on going growth as they only take a small proportion of all the loans they are offered by their panel.
Cutting to the chase I think the shares look good value down here on around 10x this years forecast earnings with a 5% yield based on both of these growing in double digits, which seem likely given the latest update and the Chairman's confident comments in the interview after the finals in April.
Looking at the chart you are would not getting in at the top if you were to buy in now as the they have come back from over £25 to their current £20 or so. Looking at the chart below I have drawn on the trading range and what is called a triangle formation by connecting the highs in the recent downtrend and it looks like it might break out of this triangle one way or the other fairly soon. The theory is I believe that it should then move by around the height of the triangle which in this case is roughly 500p. So that would suggest targets on a decisive break, of either £15 or £25 which would be around the old highs which could then act as resistance.
My money is obviously on a breakout to the upside and having top sliced some of mine near the £25 high in 2015, I have been buying some back around the £20 levels recently. As ever you pay your money and take your choice. In the meantime I'll continue to enjoy the 5% yield including the 39p final worth 1.95% which is due to go XD on 15th June.
We had interim results from Character Group (CCT) yesterday, which I last wrote up here back in September last year. Then I suggested it could provide 20%+ returns if it managed to make it back to the top of its trading range at 550p. It managed this in March so you would have been able to lock in a decent return if you managed to sell them up there. Since then they had OK final results & a slightly disappointing trading update in January when they flagged that their H1 numbers would be down due to US$ cost effects. Despite this they said they were confident of meeting full year numbers.
The interims yesterday confirmed this fall in profits in H1 as expected and they reiterated their confidence in meeting full year estimates despite this and backed this up with a 28.6% increase in the interim dividend from 7p to 9p. Looking at the pattern of their recent dividends these have gone sequentially 5, 6, 7, 8, & now 9p so with a bit of straight line forecasting I think they might do a 10p final given their progressive policy, cash balances and high cover levels. This would give 19p for the full year versus current forecasts of 16.8p for this year and 19.5p for next year. This would give a yield of around 4% at current prices.
I also note in the chart below that the management have been fairly active buyers of the stock on dips and they were buying again recently and after yesterdays interims, suggesting they have some confidence in their forecasts / prospects as they seem to be able to forecast the swings in their business quite well.
Summary & Conclusion - This appears to be a well managed company which has developed quite a good record of delivering decent profits, earnings, cash flow and dividends in recent years, although longer term it has had its ups and downs. Consequently the market seems reluctant to afford it a decent rating and therefore a dramatic re-rating (outside of a bid) does not seem to be on the immediate horizon. They have however achieved a rating of between 10 & 12x in recent years, so if they do manage to hit forecasts for this year then this would suggest the price could get up into a 520p to 620p range, so a return at least to the top of its range / resistance at 550p / 560p does not seem too much of a stretch.
On the downside it could drift off further to the bottom of its range around 430p in the short term in response to these numbers, but I think that would be an even better buying opportunity if it happens. Of course they may be over optimistic and miss the full year numbers, in which case it would probably break down out of its range.
...or Part 2 of IT's a Christmas Carol. I left you yesterday with a look at the long term track record of this UK Investment Trust. Despite this track record and the shares currently yielding over 4% Mr. Market or Scrooge has seen fit to offer this one on a discount of a little over 20%. This may help to explain some of the share price underperformance in the last 10 years which is shown above and like yesterdays graph, is extracted from their report and accounts.
Currently there are a number of potential explanations for this discount which I'll mention in passing today before we take a look into the future with the final part of this trilogy. As I want to keep this brief I'll cover some of the bear points in bullet point form as follows:
Against that I think their Investment Philosophy seems quite sensible to me:
Our investment approach is shaped by six core beliefs. By following these principles we aim to maximise clients' portfolio returns while minimising their investment risk:
While on Portfolio construction they say:
"We like our portfolios to reflect the conviction behind our best investment ideas. Hence within UK equities we concentrate the holdings on between 30 and 40 stocks. Around 50% will be invested in small and mid cap stocks and 50% in FTSE 100 stocks. Our portfolios tend to have a higher than average yield compared to the overall index. Individual sector weightings reflect our stock selection process. However we do tilt sector positions in accordance with our macroeconomic views. Each portfolio is regularly reviewed by the investment team."
I also note that the two main investment managers between them own around £15m of stock, while the Chairman has around £1.9m so their interests should be aligned with shareholders. I'll ave more to say on that in the final part when we look into the future.
So there is a brief update on the current position, with a lot to like but equally, quite a few issues that help to perhaps explain why this one is a little unloved by Scrooge, despite their best efforts, a bit like Bob Cratchit in a Christmas Carol. Now if that has not put you off do check back for the third and final instalment when I'll take a look into the future and how this might resolve in a profitable fashion. However, be warned if you are a Tiny Tim trader don't come back expecting to find short term gains this is very much a long term buy and hold story which will hopefully stand the test of time like the original Christmas Carol.