BROKERS’ NOTES: Buy Investec, sell FirstRand

Stefan Swanepoel, equity analyst at M&G Investments

BUY: Investec 

Investec has shown solid growth despite a difficult operating environment. I think the management team should receive a lot of credit for improvements to the business. The bank has a chance to optimise its operations and results even further. That is especially the case for capital and return on capital. It also has the chance to meaningfully increase its share buyback programme. There’s a lot of growth still locked up in the stock. Also, at a price-to-book ratio of 0.8 it is valued attractively. I think Investec’s return on equity will continue to improve in excess of its cost of equity, which makes for an attractive proposition. 

SELL: FirstRand 

There have been a lot of management changes at FirstRand recently, including among the CEOs of the group and a new finance director. In addition, I think higher credit losses will catch up with it in the year to come. Until now, it has been unscathed by higher bad loans. The speed at which higher credit losses come through will accelerate in the near future. The stock is trading at a forward price-to-book ratio of 1.8 and seems to be fully priced.