Absa a good bet

Mark du Toit from Oyster Catcher Investments said Absa is a promising investment offering good upside for shareholders.

Du Toit shared his views during BusinessDayTV’s Stock Watch, where he selected Absa as his stock pick.

He said he has been bullish on the South African banking sector for a while, with interest rates coming down and the appetite for credit increasing.

“The loan advances are growing at 6% for the South African banking industry as a whole,” Du Toit said.

He added that South Africa’s long bond yields are coming down, which is an important metric when evaluating banking stocks.

Apart from the attractiveness of the South African banking sector, Absa has a few specific tailwinds that make it a good pick.

Absa recently appointed a new chief executive, Kenny Fihla, who previously served as Standard Bank’s deputy CEO, and it is set to get a new head of retail banking.

He added that Absa has the highest predicted return. “Earnings can grow by 8% to 10% a year, with a dividend yield of 8%,” he said.

“These figures indicate a return of 16% to 18% per year, which is a good return in the South African market.”

All Weather Capital’s chief investment officer, Shane Watkins, shared Du Toit’s optimism about Absa.

He said Absa is a great stock pick. “If they can grow earnings, you will see an expansion of their price-to-book multiple and an increase in the book value,” he said.

“With Fihla as the new CEO, it is not hard to see this company increase its share price between 15% and 25% over the next two years.”

Banking valuation comparison