African growth with­out the pre­mium

Finweek English Edition - - INVESTMENT -

From the me­te­oric rise of Capitec and t he Michael Jor­daanin­spired resur­gence of FNB, down to the woes of African Bank In­vest­ments Limited (Abil), the South African bank­ing sec­tor has cer­tainly been in the head­lines of late.

The days of Stan­dard Bank, Africa’s largest bank by as­sets and earn­ings, be­ing the poster child of the African growth story are but a dis­tant mem­ory. Its po­si­tion has been usurped by the likes of re­tail gi­ant Sho­prite and brewer SABMiller. Since In­dus­trial and Commercial Bank of China (ICBC) ac­quired a 20% stake in Stan­dard Bank in 2008 (at R136 per share), the bank has suf­fered a se­ries of mis­steps. Its over­am­bi­tious growth for­ays into emerg­ing mar­kets in­clud­ing Rus­sia, Turkey and var­i­ous South Amer­i­can coun­tries were re­cently dis­posed of or scaled down. Per­haps anec­do­tally, the most vis­i­ble sign of the ex­cesses are the swanky new premises re­cently opened in Rose­bank (com­mis­sioned back in the heady days of the early 2000s).

The juicy prof­its up for grabs in Africa have proved hard to come by, de­spite the bank in­vest­ing sig­nif­i­cant time and cap­i­tal into this ex­pan­sion.

The team at Lentus As­set Man­age­ment is al­ways wary of in­vest­ing in great sto­ries. Ex­pe­ri­ence has shown that an ex­cit­ing and com­fort­able story is usu­ally at­tached to a com­pany whose share price has al­ready fac­tored this in. Thus the ‘ log­i­cal’ in­vest­ment the­sis doesn’t al­ways lead to su­pe­rior re­turns. It is thus un­sur­pris­ing that Stan­dard Bank was not of in­ter­est to us leading into the fi­nan­cial cri­sis of 2008 when the story was top of mind with the African ‘ bulls’. In­vestors were so con­vinced of this story that they were will­ing to pay over 3.5 times book value for this busi­ness – a his­tor­i­cal high. Un­sur­pris­ingly, the share price de­liv­ered very lit­tle for share­hold­ers over the fol­low­ing six years, leav­ing many in­vestors very dis­ap­pointed.

How­ever, back on the ground, the bank has con­tin­ued to grow its African busi­ness and book of as­sets, de­spite the above­men­tioned set­backs in other mar­kets. The dis­pos­als have sl i mmed it down to a more fo­cused unit. The cap­i­tal in­vested into its African net­work is f in­ally start­ing to deliver prof­its across Africa (out­side of SA) now con­trib­utes nearly 25% of group earn­ings. Largest African mar­kets in­clude Nigeria, Mozam­bique and Namibia. The bank has 621 branches in SA and over 500 in the rest of Africa. The bank is well placed to ben­e­fit from in­creased China/Africa trade via their strate­gic re­la­tion­ship with In­dus­trial and ICBC, which bought a 20% eq­uity stake in 2008. the 18 coun­tries that it op­er­ates in. There has not been a fun­da­men­tal change in the un­der­ly­ing busi­ness (bank­ing re­mains a very prof­itable en­deav­our), but mar­ket sen­ti­ment is such that the val­u­a­tion is now sig­nif­i­cantly more at­trac­tive.

As it is now trad­ing at just 1.5 times book value, in­vestor ex­pec­ta­tions for Stan­dard Bank have clearly nor­malised and in our view are now un­der­stat­ing likely fu­ture re­turns. In a lo­cal mar­ket with few at­trac­tively priced op­por­tu­ni­ties, Stan­dard Bank at cur­rent lev­els of­fers the op­por­tu­nity to buy a qual­ity busi­ness at a rea­son­able price.

Nic Nor­man- Smith

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