Investec Stock Analysis: Deep dive

We love Investec as a brand, but how does it hold up as an investment option? Lets dive in.

About

Investec offers a range of financial services to private, corporate, and institutional clients in South Africa and the UK. The group was established in 1974 and currently has approximately 8 300 employees. In 2002, Investec implemented a dual-listed company structure, with listings on the London (Investec PLC) and Johannesburg Stock Exchanges (Investec Limited). In March 2020, the group successfully completed the demerger of its Asset Management segment, Ninety One, which became separately listed on 16 March 2020. Investecs current market cap is approximately GBP3.0 billion / R90 billion.

Business

After the demerger of the Asset Management segment (Ninety One), Investec now operates in three segments: Wealth & Investment, Specialist Banking, and Group investments. 

• The Wealth and Investment business specializes in wealth management, portfolio management, private office, and stockbroking services for individuals, families, trusts and charities. 
• Its Specialist Banking consists of private, corporate, and institutional banking services.
• The Group Investments pillar consists of equity investments held outside the groups banking activities, such as 25% holding in Ninety One and 24.4% in Investec Property Fund.

Revenue drivers

Segment revenue contribution is as follows: 72% Specialist banking, 23% Wealth& Investments, and 5% Group Investments. 

Investecs revenue avenues consist mostly of banking interest, fees, and commissions.

Geographically, income is generated more or less equally between South Africa and the UK. 

Technical Analysis

Market structure bullish since the latter half of 2020. It did, however, break market structure with a lower high and lower low in June compared to April. The share price is currently at its medium-term support level at around 8850c. The short-term break in market structure does diminish the validity of the support slightly. 

Our two momentum indicators, the RSI and MACD, are both approaching oversold territory on the weekly time frame. This coincides with the support level that the price is currently testing. Should the market structure hold, we could see a short-term trend reversal to the upside. 

Financials

As Investec is operating mostly on interest, fees, and commission incomes, it does not have a traditional income statement with sales, cost of sales, gross profits etc. The income statement starts with interest income and interest expense (from the Specialist Banking segment) followed by non-interest revenue under the header other incomes and expenses (mostly fees and commissions) to arrive at operating income. Thereafter, operating expenses (such as salaries and marketing) are considered to finally arrive at operating profit.

Net interest income (interest income minus interest expense in Specialist Banking) increased 21.5% to 945.3 million (FY2021: 778.1 million) driven by higher average interest on loans granted. 

Non-interest revenue (mostly fees and commissions) increased 21.1% to 1 045.1 million (FY2021: 863.0 million), driven by improved client activity across the board and higher average Funds Under Management (FUM) in Wealth & Investment.

The overall 2022 performance led to strong earnings recovery above pre-pandemic levels. Adjusted Earnings per share (EPS) 2019 through 2022: 52.5p, 37.8p, 28.9p, 55.1p. 

Although Investec delivered brilliant 2022 results, the 10-year-picture does not look so appealing. Long-term growth is always more important than short-term growth. The 10-year compound annual growth rate is a mere 0.68%.  This is never what you want to see as an investor. Rule nr 1 is strong revenue growth.

Investecs balance sheet is pretty simple: Assets are dominated by loans granted, and liabilities are dominated by total deposits from clients. Just like one would expect a bank to operate. The balance sheet tells the same story as the income statement: Strong 2022 results, but the longer time frame tells the story of a stagnant company. 

Valuation

Common ratios to analyse banks include the price-to-earnings (P/E) ratio, the price-to-book (P/B) ratio, ROE, cost-to-income, loan-to-deposit ratio, and capital ratios.

P/E: 8.63 is more or less equal to the industry average. Standard Bank, Nedbank, and ABSA trade on PEs of 10, 11.5, and 7.8 respectively. 

P/B:  Traditionally, any value under 1.0 is considered a good P/B value, indicating a potentially undervalued stock. P/B was very attractive before the surge in price - it traded at roughly 0.3 a year ago, before surging to 0.8 where it is today.  

ROE: The groups ROE target is between 12% and 16%. This year it achieved 11.4%, which is surprising considering the good year it has had. 

Cost-to-income is calculated by dividing the operating costs (such as salaries and marketing) by operating income (net interest, fees, and commissions). The lower, the better. The company achieved 63.3% in 2022, falling just outside of its target of <63%.  

Loan-to deposit: The loan-to-deposit ratio is used to assess a bank's liquidity by comparing a bank's total loans to its total deposits for the same period.  If the ratio is lower than one, the bank relied on its own deposits to make loans to its customers, without any outside borrowing. Investecs loan-to-deposit ratio was 69.3% as of 31 March 2022 (31 March 2021: 74.6%). This is fairly standard and well within safe practices.

Buy/Hold/Sell

Investec has a very strong brand and is known for delivering excellent services. The financials look good, but the lack of revenue growth, the strong recent share price rally, and the valuation metrics have shifted the stock from the undervalued category into the fairly valued category in our opinion.

Will we bank at Invested? Of course. Will we invest in it? Not at the moment, as we believe there are better opportunities currently in the market. Watchlist it is.   

Just a friendly reminder - This is not financial advice. Always do your own research before taking a position. Content is for informational and educational purposes only.