BROKERS’ NOTES: Buy Absa, sell Truworths

Rowan Williams, portfolio manager: Nitrogen Fund Managers

BUY: Absa 

We like Absa. The banks are in a good space, they’ve managed credit risk in a rising rate environment well so they’re getting the benefit of the endowment effect without the concomitant rise in bad debts.

Absa has a very low rating and it recently completed the placing of the remaining tranche of shares owned by Barclays, so that overhang has now gone away.

Historically, it’s  had fairly poor execution relative to other banks, partly thanks to the Barclays ownership —  Barclays  didn’t understand the SA banking environment — and it is  quite quickly regaining market share. It also has a lot of potential to mine its  existing customer base, which should improve all its business metrics, like noninterest income growth. It’s  been a little more aggressive in lending and overall the consumer doesn’t seem to be in a terrible space.  So all-in-all it stacks up to a low-risk investment opportunity with good upside potential and a good dividend underpin.

SELL: Truworths 

We don’t like Truworths. It’s still stuck as a credit retailer so the business model is outdated — selling clothes on credit. It’s facing a lot of competition and is  struggling to move beyond the core women’s wear business. The recent good results were also due partly to the write-back of bad debt provisions. And in the UK it was enjoying government support at the Office footwear business, in terms of lease relief and employment support, and that will fall away now even as the UK economy is looking like it’s going to struggle.