BROKERS’ NOTES: Buy FirstRand, sell Vodacom

Mark du Toit, portfolio manager: OysterCatcher Investments

Buy: FirstRand

FirstRand is a leading financial services group and also owns a lending business in the UK. The recent changes in the leadership demonstrated the depth of management in the business, and the current regulatory returns show that the South African business is robust. The share price has recently underperformed due to the uncertainty regarding the Financial Conduct Authority (FCA) investigation into motor finance practices in the UK. FirstRand’s MotoNovo Finance business is included in the FCA review, along with other UK institutions including Lloyds Banking Group. Still, FirstRand’s underperformance offers the opportunity to buy a world-class bank at a depressed multiple and an attractive long-term return.

Sell: Vodacom 

Vodacom is a capital-intensive business in a competitive market with low margins. Telecoms businesses require constant reinvestment in their networks to maintain service levels. The South African business also faces revenue headwinds due to the switch from voice calls to data calls. Vodacom’s other geographies also face challenges. Egypt is under macroeconomic pressure and another currency devaluation is likely. Ethiopia is still in the investment phase but early indications are that the ramp-up will take longer than planned. The investment in Safaricom, which houses M-Pesa — arguably the best fintech business in Africa — faces slowing growth due to its size in the Kenyan market. Vodacom does offer an attractive dividend yield, but earnings growth will be difficult to achieve.