All eyes on Old Mutual’s corporate actions
It is not expected to repeat its 2016 results so the focus is on the progress of the managed separation programme
The key issues concerning shareholders when Old Mutual reports its results in early August will not be the short-term numbers, but its corporate action plan.
Few analysts expect it will be able to repeat its 2016 results.
The UK-based Old Mutual Wealth results will not look good when translated back into rand. The average rand/pound exchange rate has strengthened about 30% over the six months in favour of the rand.
All the chatter in the bars around the Sandton finance houses is focused on the progress of the managed separation programme — which will split the business into four.
Simon Raubenheimer, a portfolio manager at Allan Gray, says Old Mutual has been one of the big disappointments of the past year, falling 20% from its highs to R33.
Allan Gray hangs on to its large holding (it is one of its top five shares), waiting for value to be unlocked.
So far it hasn’t felt it necessary to put its foot down as it did at Group Five. Old Mutual CE Bruce Hemphill’s two big successes have been the sale of the bulk of the shares in OM Asset Management in the US to HNA Capital. Once the sale is completed Mutual will be left with just 5% of the business. And Hemphill lowered the flag and sounded the retreat from the group’s Indian venture.
But there remains uncertainty around Old Mutual Wealth. Speculation has resurfaced in the British press that a private equity fund will swoop on the business.
The most likely candidates are the Swedish activist group Cinven and Warburg Pincus, part of the US private equity establishment. It looks as though Wealth is being groomed for sale: it was the only part of the group to provide quarterly information to March. Its net client cash flow (admittedly in devalued pounds) was up 59% to £2.7bn and funds under management up 6% to £122.3bn.
If Old Mutual Emerging Markets had numbers anywhere as good as this, no doubt they would have been published.
The new CEO of Emerging Markets, Peter Moyo, has returned to the group after more than 10 years. It is no longer the comfortable market leader it was then, especially in the retail affluent sector. Its total sales growth last year was 6%, in line with inflation.
That will be tough to repeat in an environment in which market leader Sanlam had a 4% fall in business volumes (in the four months to June), leading to a fall in net fund inflows from R16bn to R12bn. The only encouraging indicator is that Sanlam Sky, the mass market business, grew sales by 27%. Old Mutual has a considerably larger and more profitable footprint in this market, which could save the day.
Corporate business, which Moyo used to run, is usually a reliable part of Old Mutual’s bottom line. But this time it will be hit by the widespread increase in disability claims, a feature of all economic downturns.
The separation of Nedbank should not be painful. It has been put off until an Old Mutual SA holding company is listed, as this will make distribution of the shares more favourable from a capital gains tax perspective. Jaap Meijer, analyst at Dubai-based Arqaam Capital, believes Nedbank will have acceptable interims with positive growth of 3.7% in net interest income to R13.9bn. He says one of the strengths of the Nedbank franchise is the large exposure to property finance, which has been a very resilient category of loans. Nedbank’s wholesale category in general gives it better growth, though lower margins, than retail-focused banks such as Absa.
The Nedbank interims will be hit by a further R1bn impairment of its holding in Pan African lender Ecobank. Meijer says there is now a free option on Nigeria, as Ecobank’s fortunes will change swiftly if Nigeria recovers.