14th Sep 2018 11:27
LONDON (Alliance News) - Investec PLC said on Friday its interim profit is expected to be ahead of last year, as it also announced plans to demerge and publicly list its Asset Management business.
"They say breaking up is the hardest thing to do, yet there increasingly doesn't seem to be any problems with corporates splitting into two," commented Russ Mould, investment director at AJ Bell.
The news from Investec comes in a year which already has seen some major corporate splits.
Fellow Anglo-South African financial firm Old Mutual Ltd spun off Old Mutual Wealth, now Quilter, as part of its "managed separation", while Whitbread PLC just last month sold its Costa Coffee business to Coca-Cola Co after announcing the much-awaited demerger of its coffee chain in April.
London-listed Investec shares were up 8.9% at 527.60 pence on Friday, the best performer in the FTSE 250. At the top of Johannesburg's Top 40 index were Investec Ltd and Investec PLC, both more than 8% higher at ZAR102.26 and ZAR102.46 respectively.
Following the conclusion of a strategic review, the company on Friday said that there are "compelling" linkages between its Specialist Banking and Wealth & Investment business.
However, there are "limited synergies" between both of these divisions and Investec Asset Management. Therefore, the board has decided to demerge and publicly list its asset management unit.
"The board believes that this transaction simplifies the group and focuses IAM and the remaining group on their respective growth paths, which will enhance the long-term prospects and potential of both businesses for the benefit of their shareholders, clients and employees," Investec said in a statement on Friday.
The asset management unit had third-party assets under management of GBP109 billion as at August 31. This has risen from just GBP40 million in 1991, Investec said, with the unit organically growing third-party AUM at an annual compound rate of 14% over the last ten financial year.
"As an independently listed company, IAM will be better positioned to accelerate its growth and have an enhanced ability to attract and retain investment talent," said Investec.
Investec said its strategy going forward is to drive improved returns through growing market share in its niche businesses, implementing cost efficiency initiatives, and driving further collaboration between the Specialist Banking and Wealth & Investment businesses.
The demerger is expected to complete within the next twelve months. It is intended that the asset management business will be listed on the London Stock Exchange with an additional "inward" - or foreign company - listing in Johannesburg.
"The IAM management stake in the company will be retained and the remaining group may retain a minority stake in IAM. Post the implementation of the transaction, shareholders of the Investec group will have a direct shareholding in IAM in addition to their holding in the remaining group," explained Investec.
As first announced in February this year, Fani Titi and Hendrik du Toit will become joint chief executives of Investec at the start of October. Kim McFarland also will become an executive director on that date.
Stephen Koseff and Bernard Kantor will step down from their roles as CEO and managing director, respectively, on October 1. From that date they will serve as executive directors to ensure a smooth handover.
Following the implementation of the demerger, Titi will lead the remaining group, and du Toit will lead the asset management unit. The structure and composition of the boards of both Investec and the demerged unit will be decided in due course, the company added.
"Investec's plan to spin off its asset management arm looks like a sensible decision as it should allow management more freedom to drive that business forward and not be constrained by having to follow the strategy of the current parent which is predominantly a specialist banking business," comment AJ Bell's Mould.
Mould also noted that spin-offs of this kind have the potential to trigger merger & acquisition activity.
"Separation can sometimes entice takeover interest should a predator have been interested in part of a company but was previously put off from making an offer as it didn't want to swallow the whole group," said Mould.
In a separate pre-close update on Friday, Investec said that, though its first half saw "macro challenges" in both South Africa and the UK, operating profit for the period is expected to be above last year.
During the six months ending September 30, South Africa entered into a technical recession while Brexit uncertainty "persisted" in the UK.
Against this backdrop, the Asset Management business is expected to report results ahead of the prior period, while the Wealth & Investment business is expected to report results behind last year.
"Both divisions have benefited from higher levels of average funds under management supported by favourable equity markets and sound net inflows," said Investec.
The Specialist Banking business is also expected to report results ahead of last year. Within this, the UK Specialist Banking business is expected to report results "well ahead" while the South African unit performed in line with the prior period in rand terms.
Group results were dented by the depreciation of the rand against the pound, the company added.
Nonetheless, operating profit for the period is expected to be above last year with revenue "moderately ahead".
Recurring income as a share of total operating income is to edge up to 78% from 76% last year. The total income statement impairment charge for the period is expected to be less than a year ago, with the annualised credit loss ratio on average core loans and advances to be between 0.21% and 0.25%.
This compared to 0.61% in March, and 0.54% in September last year.
Costs are expected to be higher year-on-year due to growth in its headcount to support both activity levels and increased regulatory requirements.
For the five months to August 31, third party assets under management rose 4.0% to GBP167.0 billion. Customer deposits fell 5.5% to GBP29.3 billion, while core loans & advances also declined 5.5% to GBP23.7 billion.
Despite the uncertainty in the UK, activity levels have been "acceptable", the bank said. Meanwhile, growth in South Africa has been "challenging" due to weaker investment confidence and negative emerging market sentiment.
Looking more closely at divisions, Asset Management saw earnings supported by "substantial" net inflows of GBP4.4 billion through the period to the end of August.
In Wealth & Management, the global business is expected to deliver a weaker performance than last year due to earnings in South Africa being hit by lower activity levels and higher costs in the UK.
In Specialist Banking, net interest income rose thanks to book growth in both the UK and South Africa. Net fees and commissions growth was support by a "good performance" from the UK corporate advisory business as well as South African private and business banking activities.
However, investment income is expected "well behind" a year prior due to a weaker performance in both listed and unlisted investments.
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