Old Mutual target is still some way off
Almost a month after its new listings, the company’s managed separation has yet to unlock value
The managed separation at Old Mutual had a clear aim: to unlock value by listing independent standalone businesses and scrapping the top holding company. Almost a month after listing, that goal is still some way off.
Prior to the separation, Old Mutual Plc had a market capitalisation of R200bn. Now, with the Africa-focused Old Mutual Ltd on R133bn and Quilter on R51bn, almost 10% of the value has been lost. Avior Capital Markets head of research Warwick Bam says the decline has more to do with global macro conditions — a sell-off across emerging markets — and does not reflect stock-specific issues.
Old Mutual was expecting its share price to drop as it has exited the FTSE 100, as billions of pounds track this index. The new Old Mutual Ltd will get a prominent berth in the MSCI emerging markets index, but that isn’t much compensation.
As much as Old Mutual made a fuss about "anchoring in Africa" and tried to celebrate with green vuvuzelas in Sandton on its relisting, many observed on social media that the company had beat a humiliating retreat.
If all its acquisitions had worked out, it would have been a genuinely global financial services business — another Axa, AIG or Allianz. But Africa isn’t a bad second prize, though for now that still means SA and a couple of its neighbours. Its footprint in East and West Africa is limited, especially compared with Sanlam.
Avior’s Bam says Old Mutual can still gradually outperform its peers. "But first new investors need to understand the business in its new form, which will take a reporting cycle. Management needs to deliver on operational growth and distribute the excess capital from the wound-up holding company and the proceeds of the upcoming sale of the Latin American business." He adds that Old Mutual needs to complete the unbundling of 32% of Nedbank, which it has promised to do within six months.
Dale Hutcheson, who runs the Absa Prime Equity Fund, says it will probably take years of impeccable financial and operational behaviour before Old Mutual gets onto the Absa Asset Management buy list.
New investors need to understand the business in its new form, which will take a reporting cycleWarwick Bam
"It made a long line of poor decisions, and how do we know that won’t persist?" he asks.
Hutcheson contrasts this with Sanlam, which has delivered consistently to shareholders — though its acquisition in Morocco has changed the shape of the business significantly, which concerns him.
Old Mutual listed in an environment in which SA life insurance has been out of favour. Sanlam peaked at about R210bn in March and is now on R154bn. But it still has a substantial premium over Old Mutual Ltd.
Another frustration with Old Mutual is that it is taking time to distribute its shareholding in Nedbank. Its 54% holding in the bank now accounts for more than half of Old Mutual’s market cap. Many are disappointed that Nedbank won’t get full independence as Old Mutual will retain a hefty 19.9% stake.
Quilter, run by Paul Feeney, has been well received in SA as another pure rand hedge and in the UK as a successful local business. It has benefited from the support of FTSE 350 trackers and is big enough to get some serious attention, with its market cap nudging £3bn.
Managed separation means its competitors can’t call it part of an old-school SA life insurer. It is now on equal footing with its main London-listed competitors, such as St James’s Place and Hargreaves Lansdown. It is a good thing Quilter wasn’t sold before it could come to the market: it is available as a pure pound sterling play with less obvious risk than, say, Intu Properties, a highly geared UK shopping centre landlord.
Quilter is in the capital-lite business of financial planning, multimanager funds and investment platforms (linked investment service providers), and it has very low client turnover. It is also nationally represented.
The Quilter business had a substantial boost through new laws that no longer require retirees to buy life insurance-run annuities, but rather to buy drawdown products similar to (and perhaps directly modelled on) SA’s living annuities.
It is hard to tell what will be the catalyst for a revival in Old Mutual Ltd under Peter Moyo. Andrew Vintcent, who manages the ClucasGray Equity Fund, says that with a market cap of about R65bn without Nedbank, Old Mutual is on a discount of about 45% to its intrinsic value, and many metrics show it is as unloved as sector ugly ducklings Liberty and MMI.
Of the two new listings, Old Mutual Ltd looks like the better investment.
Quilter has a great investment model on paper, but most of its component parts have been bought over the past three to five years and still have to blend together optimally.
It is, however, a relief that these completely different businesses have been separated and that investors can make a choice.