Why Liberty’s interims show little progress
Margins have been diminishing across Liberty’s business units for some time
Former Liberty CEO Thabo Dloti’s final set of results shows that the insurer managed to only marginally narrow its earnings decline during the six months to the end of June from its infamous full-year 2016 period.
Liberty posted normalised earnings 30% down to R1.3bn in its half-year results, which new CEO David Munro — who has held the job for just over two months, one of which was covered by the latest results — presented on Friday. This compares with a 39% earnings decline at the end of December. Shareholders did not like the results, sending the share 6.06% down by the close on Friday.
"Our challenge in these results is the decline in value of new business to R80m and that’s what we need to make sure we improve in the second half and in 2018," Munro said.
He is former head of corporate and investment banking at Liberty parent Standard Bank.
The value of new business fell from R257m in the first half of 2016, which the insurer attributed to its undesirable sales mix and cost pressures. "The mix of business that we sold didn’t generate enough margin for us, so we’ve got to work hard to restore that margin and adjust the mix," Munro said.
Margins have been diminishing across Liberty’s business units for some time. Rahima Cassim, fund manager at Ashburton Investments, said on Friday that it needed to be tackled urgently. "The 0.4% margin achieved is low, even given the new tax regime," he said.
In 2016, a "risk policy fund" under the Taxation Laws Amendment Act No25 of 2015 was introduced, effectively increasing the potential tax on life and disability policies.
Liberty’s half-year earnings were little improvement on the insurer’s full-year results, when earnings nearly halved to R1.7bn. This came as asset manager Stanlib’s business in the rest of Africa recorded losses and it experienced strain in the South African retail insurance business. The experience was similar this time around, with Stanlib — both in SA and across the continent — dragging group earnings down.
The poor full-year results prompted a rethink of the group’s turnaround strategy. This led to differences between Dloti and the board on the way to move forward.
"Key operational metrics appear to be weakening," said Cassim. "The results presentation did not give clear guidance on the implementation of strategy and, as such, there is uncertainty from the market, which is negative for the stock."
Adrian Cloete, portfolio manager at PSG Wealth, said that Liberty’s earnings had been expected to be muted due to its challenging operating conditions against a weak economic backdrop and its better performance in the first half of 2016.
"The actual number seemed to disappoint the market as the share price is down," he said.
At Friday’s close of R112.30, the group was trading below its normalised group equity value of R143.16 per share.
"The normalised group equity value per share is the main driver of the long-term share price," said Cloete. "So, when the market becomes more confident about the turnaround, Liberty’s share price will be more correlated to this metric again."
On the group’s turnaround strategy, Munro said he had been focused on handing over his responsibilities at Standard Bank and "listening, learning, understanding and observing [Liberty’s] business".