Chantal Marx, head of investment research and content at FNB Wealth & Investments, on what the smart money is doing
15 May 2025 - 05:00
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We are positive on the South African banks, broadly speaking, with credit experience expected to improve on certain consumer tailwinds including real wage growth, lower inflation and lower interest rates.
Absa’s strategic and operational performance has been lacklustre compared to its peers over the past few years, and it has delivered a structurally lower return on equity as well. The investment case has not been helped by a chaotic top management structure. The new CEO starts in mid-June and we see scope for improvement on various fronts. The growth outlook is solid rather than exciting, with high single-digit growth expected over the medium term, supported by mid single-digit revenue growth.
Along with the rest of the sector, the stock has derated year to date and now trades on an undemanding price-to-book ratio of 0.9 times and a deeper than usual discount to its peers. The share is also offering an attractive forward dividend yield of 9.6%. We are comfortable entering a long position at current levels, with a near-term target price of R200.
Avoid: Aspen
The company unexpectedly announced to the market recently that there was a material contractual dispute in its manufacturing business that could result in earnings before interest, tax, depreciation and amortisation for that business halving. The net impact on group earnings will be small, but the issue for Aspen is that if it loses this contract, it could take a long time to replace the capacity and fill the remainder of its excess manufacturing capacity, which is expected to drive the division to become a meaningful contributor in the longer term. In the medium term the lower contribution will be a drag on group results.
The share price reacted violently to the initial announcement. The stock has recovered slightly, but recent sell-side adjustments have seen target prices move more closely to the R120 mark, where the stock is trading currently.
We think the consumer business is fairly valued and that there is no value currently attached to the manufacturing business. This means there is optionality either side — if the manufacturing business costs the company money, it will detract from the valuation, but if it replaces and fills capacity faster than expected, we could see a sharp move up in the share price. Earnings visibility is poor, operational risk is elevated and trust in management has been eroded. Avoid for the time being.
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BROKERS’ NOTES: Buy Absa, avoid Aspen
Chantal Marx, head of investment research and content at FNB Wealth & Investments, on what the smart money is doing
Buy: Absa
We are positive on the South African banks, broadly speaking, with credit experience expected to improve on certain consumer tailwinds including real wage growth, lower inflation and lower interest rates.
Absa’s strategic and operational performance has been lacklustre compared to its peers over the past few years, and it has delivered a structurally lower return on equity as well. The investment case has not been helped by a chaotic top management structure. The new CEO starts in mid-June and we see scope for improvement on various fronts. The growth outlook is solid rather than exciting, with high single-digit growth expected over the medium term, supported by mid single-digit revenue growth.
Along with the rest of the sector, the stock has derated year to date and now trades on an undemanding price-to-book ratio of 0.9 times and a deeper than usual discount to its peers. The share is also offering an attractive forward dividend yield of 9.6%. We are comfortable entering a long position at current levels, with a near-term target price of R200.
Avoid: Aspen
The company unexpectedly announced to the market recently that there was a material contractual dispute in its manufacturing business that could result in earnings before interest, tax, depreciation and amortisation for that business halving. The net impact on group earnings will be small, but the issue for Aspen is that if it loses this contract, it could take a long time to replace the capacity and fill the remainder of its excess manufacturing capacity, which is expected to drive the division to become a meaningful contributor in the longer term. In the medium term the lower contribution will be a drag on group results.
The share price reacted violently to the initial announcement. The stock has recovered slightly, but recent sell-side adjustments have seen target prices move more closely to the R120 mark, where the stock is trading currently.
We think the consumer business is fairly valued and that there is no value currently attached to the manufacturing business. This means there is optionality either side — if the manufacturing business costs the company money, it will detract from the valuation, but if it replaces and fills capacity faster than expected, we could see a sharp move up in the share price. Earnings visibility is poor, operational risk is elevated and trust in management has been eroded. Avoid for the time being.
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