The CFDealer: Reconsidering Investec

Back in June I recommended a long in Investec after it dropped by over a pound, seemingly on the grounds that the stock was oversold on profit taking and that it represented good value compared to its London-listed peers.

With hindsight I should have shown more caution because the purchase of Kensington Group, the mortgage provider that specialised in providing loans to individuals with a poor credit history, seemed to have damaged sentiment and placed question marks over the management’s strategy.

In late July, the stock closed below the suggested stop loss of 635p and subsequently the stock hit an intra-day low of 469p on 17 September. The stock has twice tested breaking the 469p/470p area and failed (so far).

In a pre-close trading statement issued on 20 September it stated it was well-placed to meet interim financial targets despite global volatility in markets and the purchase of Kensington.

Group chief executive Stephen Koseff said, ‘We expect a very strong performance from South Africa and Australia and a reasonable performance from the UK which has been marginally impacted by the turmoil in the credit markets.’

Investec expects lower profitability from its initial projections for Kensington ‘until market conditions normalize’, Koseff stated. The shares have fallen 27%, wiping £800 million off its value, since the announcement of purchasing Kensington Group on 30 May. It seems harsh considering Investec paid £283 million for the mortgage provider.

Assets under management increased 1.5% to £30.3 billion as earnings growth continued to be enhanced by the momentum of the UK and international business, the company said. Despite Investec’s woes with Kensington Group, it said it had low exposure to US sub-prime lending of 0.4% of the group's loan portfolio.

On 9 August Bernard Kantor, the group’s managing director bought 200,000 shares at 562p, about 9% above yesterday’s close. The stock trades on a price to earnings ratio based on fairly dated forecasts of just 7.9 for 2007 and 6.8 for 2008.

I believe the shares are oversold and that they could perform strongly over the next month or so, especially as the rand seems to have stabilized at 14 to the pound and the credit markets seem to have settled down.

Long positions should be considered below 520p with a stop loss based on a close below 469p and a target of 594p.

This report was written by the Graeme Dickson (graemedick50n@hotmail.com), an equities trading specialist, who does not hold any shares or derivatives in Investec. The material used for this report has come from Citywire & Thomson Financial/Datastream.