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Investment Insights: FirstRand






Share price: R47.60 

Net shares in issue: 5,61 billion

Market cap: R267,0 billion 

Fair value: R44

Target price: R51

Trading Buy and Portfolio Buy

Market pressures notwithstanding, including declining automotive sales, FirstRand continues to have a clear lead on peers Barclays Group Africa, Nedbank and Standard Bank. Whilst the peers do show some improvement on certain metrics relative to FSR in recently published annual results, the differences are insufficient to narrow the rating gap to any large degree. In tough times this remains a quality exposure to financials.  

The six month results ended 31 December 2015 were pleasing and the upshot is that I’ll probably not be adjusting my full year estimate, at least not to a material degree. I currently have full year EPS at 419 cents compared with 378,5 cents in F2015, growth of 10.7%.   

In assessing these results, the following things should be considered. 

  • Bad debt charges are rising in banking and so strong portfolio provisions are necessary. FSR has best in sector performing loans coverage of 97% - well above the bad debt charge of 0,77%.
  • Non-performing loans to advances edged up from an already historic low 2.2% to 2.3% and is well below BGA on 3.9% or SBK on 3.2%.
  • The credit loss ratio of 0.77% (maintained) compares with BGA of 1.05%, NED also on 0.77% with SBK on 0.87% (down from 1.00%).
  • Net interest margin of 5.01% (down from 5.21%) compares with NED on 3.30% (down from 3.52%), SBK on 3.5% (down from 3.8%) and BGA on 4.81% (an improvement from 4.65%).
  • Return on equity at 23.4% (down from 24.0%) remains well above cost of capital and compares with BGA on 17%, NED on 17% and SBK on 15.3% (tangible 17%).
  • Tier 1 capital ratio at 14.4% compares with BGA on 12.6%, NED on 12.0% and SBK on 13.3%    
  • Cost flexibility is indicated in the cost to income ratio of 51.1% (up from 50.8%) and high proportion of variable costs relative to peers. BGA is on 56.0%, SBK on 56.7% and NED 56.1%.
  • Continued improvement in funding mix with substantially reduced exposure to institutional and much more on retail (now 19% of funding).

Adjusted headline earnings grew by 9% to R10 915 million with FNB (up 9%), RMB (up 15%) and Wesbank (up 15%) growing earnings collectively by 12%. This was driven by an 11% growth in net interest income after provisions and 5% growth in non-interest income. Due to the BEE structure maturing a small number of shares were bought back and so adjusted headline EPS grew by 10% to 194,6 cents.

The interim dividend is lifted by 16% to 108 cents.

The dividend cover was adjusted down slightly to 1.8x at the end of the last fiscal and there is no change in payout policy just because the dividend grew by more than earnings. My forecast of a 10% growth in full year dividend to 232 cents remains.   

Net asset value has risen by 12% to R96 billion which is 1709 cents per share.

Strategy has shifted slightly toward developed markets, particularly UK and the Channel Islands, whilst holding the fort in Africa with existing operations.

Management feedback is that they are cautious on the immediate outlook, rather more so than at the end of F2015.

FSR is on an exit PE of 11.7x on my estimates with the price to book at 2.8x. The forward PE is 11.4x and the forward dividend yield 4.9%. The valuation premium to peers remains.

The FSR share price has outperformed peers over the past few months and of late has run up ahead of my fair value of R44. The stock though remains in range with my target price unchanged at R51.   

Mark N Ingham

Ingham Analytics Ltd

08 March