Not buying Unicorns but I'm backing a Zebra.

​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.

Investec 10 year chart