It is always with a great deal of trepidation that we add an emerging markets stock to our pick list. They can be hard to buy if you have the wrong broker, they trade in markets subject to some intense volatility and instability at times and they can be prone to a lack of transparency.
South Africa’s finance sector has had more than its fair share of scandals in recent years, so when FirstRand (JSE:FSRJ) came up on my radar I was tempted to leave it well alone.
Interesting upside price action from FirstRand
However, in other respects the Johannesburg-listed financial services stock has some interesting price action going for it. We have seen some similar dynamics coming out of the UK banking sector in February. Banks have been heavily sold during the pandemic, and this stems from a lack of uncertainty about the direction of the global economy and the credit situation with corporate clients. Investors are starting to feel a little more confident as vaccines are rolled out, and we are seeing this sentiment creeping into financial services stocks.
FirstRand is a diversified financial services play (market cap ZAR 294bn) in both South Africa and also other African countries. Under its umbrella sit African banking franchises like First National Bank and Rand Merchant Bank. But it also has its fingers in other pies, like investment management and commercial lending. The stock has an ADR listed in the US OTC market (FANDY) that trades in USD, although buying direct in Johannesburg could expose you to punishment from the South African rand.
Large institutional shareholder base
FirstRand has a big institutional shareholder base, which includes the great and the good in South Africa. Institutional ownership is 45% but there is also a lot of other public company crossholding going on. Individual investors make up only a tiny proportion of the overall shareholder base. It is one of those stocks that will be sitting in many pension fund portfolios for years and years. The company’s biggest shareholder is RMB Holdings, with 34% of the stock.
The revenue and earnings picture for FirstRand seems to be pretty positive (P/E ratio 17.15, EPS 3.04). It will have taken some level of damage from COVID in South Africa but Africa overall has so far navigated the pandemic better than the developed world. FirstRand told the market last month it was seeing a better than expected recovery, sparking more optimism from local investors, who are buying the stock. It says it plans to return to paying dividends next year.
Slowly returning to pre-pandemic price levels
FirstRand’s share price dropped off a cliff when the pandemic took root a year ago and has not been back since. It has seen quite a bit of volatility with some short term share price rallies cut off by heavy selling. Volume wise you see investors piling in, and then some severe profit taking, while long term investors in South Africa are in there for the next decade. For example, the share was heavily bid up in May, then sold off again in June. In early November, however, buyers stayed in and that rally has seemingly been locked in – the stock has not dropped under the 4500 level since then.
The really interesting target for FirstRand stock now is 5500. There is no reason why it can’t make that and management has already been hinting that it expects better numbers to come in 2021. Volatility is still there though: we saw it in January when the market sold FirstRand down to 4675, so caution is the order of the day.
Key points:
- Diversified African financial services blue chip stock
- Huge institutional shareholder base
- Still not back to pre-pandemic levels, but will get there, so upside potential here
- Prone to some aggressive profit taking
- Watch out for the South African rand if buying stock locally
