Shoddy shares

Both com­pa­nies of­fer poorer value than their prod­ucts

Finweek English Edition - - Companies & Markets - VIC DE KLERK vicd@fin­

SAN­LAM PRE­DICTS its head­line earn­ings for the six months to June this year have fallen by be­tween 20% and 25%. Nor­malised earn­ings – that is, all the ad­just­ments re­quired un­der the IFRS, the cur­rent gen­er­ally ac­cepted in­ter­na­tional ac­count­ing stan­dards – left out of ac­count are be­tween 55% and 60% less, the com­pany warns. San­lam says the rea­son for its poor per­for­mance is be­cause “the ad­verse per­for­mance of global eq­uity and debt mar­kets had a neg­a­tive ef­fect on in­vest­ment re­turns”. The group also ad­mits its ex­po­sure to the re­sources sec­tor, which per­formed fairly well over the past year, was too low.

Both state­ments con­firm that San­lam’s own shares are in fact not worth in­vest­ing in. In fact, the same prob­a­bly goes for the shares of all as­set man­agers, from Corona­tion to Old Mu­tual, to name just two.

As­set man­agers’ prof­itabil­ity is di­rectly af­fected by the fluc­tu­a­tions in the prices of other fi­nan­cial as­sets. In­vestors are there­fore far bet­ter off buy­ing Sa­trix 40, the in­dex of our Top 40 shares, rather than San­lam (see graph). And re­mem­ber the Sa­trix 40 can’t make a mis­take, such as be­ing un­der­ex­posed to the re­sources sec­tor. The more the prices of re­sources shares, or any shares, rise, the more im­por­tant they be­come in Sa­trix 40’s non-hu­man in­flu­enced port­fo­lio. As­set man­agers such as San­lam make mis­takes.

Apart from San­lam’s ac­knowl­edge­ment that it didn’t read the storms on SA’s and global fi­nan­cial mar­kets com­pletely cor­rectly and faulted with in­ad­e­quate re­sources ex­po­sure, San­lam of course still has a large di­rect in­vest­ment in San­tam.

That short-term in­surer has al­ready warned its head­line earn­ings for the same six-month pe­riod could per­haps be 95% lower than in the pre­vi­ous year. That’s the rea­son why San­lam ex­pects its nor­malised earn­ings could be as much as 55% lower for the six months to June 2008.

The same charge about the in­vest­ment qual­ity of San­lam’s shares can be lev­elled against Old Mu­tual’s shares – in fact, much more so. In the old days, just af­ter its list­ing, San­lam’s share price and that of Old Mu­tual a short while later was just more than half that of its big brother. Now San­lam is at least trad­ing at 1750c/share.

Old Mu­tual’s man­age­ment was much more suc­cess­ful in go­ing back­wards and its price of 1350c/share on the JSE is a shocker. It never was or is wor­thy of in­vest­ment. Old Mu­tual de­cided to list on the Lon­don Stock Ex­change rather than on the more mod­est JSE. The per­for­mance of its share price against the FTSE 100 shows that over the past two years Old Mu­tual’s board and man­age­ment had to work pretty hard to de­stroy so much rel­a­tive value. It couldn’t have hap­pened just by it­self.

Of course, in­sur­ers are quick to point out to in­vestors their profit isn’t the full story. The so-called em­bed­ded value, which is just a form of net as­set value, ap­par­ently says much more. San­lam re­cently went one step fur­ther and chose now to call it group eq­uity value (GEV; see box). In­vestors must ex­press the cur­rent share price as a per­cent­age of the GEV.

In the case of San­lam, the GEV at the endDe­cem­ber 2007 was a healthy 2350c, while it’s cur­rently trad­ing at just 1750c/share. That’s a huge dis­count of 25%. That says one of three things: San­lam’s GEV is fall­ing, San­lam’s shares cur­rently of­fer ex­cel­lent value or – the most danger­ous and the most likely – in­vestors are just no longer in­ter­ested in San­lam’s busi­ness model.

There’s very lit­tle that San­lam or Old Mu­tual can do to un­bun­dle their as­set value to their share­hold­ers. Es­pe­cially not if their tra­di­tional pa­ter­nal­is­tic at­ti­tude to or­di­nary share­hold­ers is taken into con­sid­er­a­tion. For ex­am­ple, San­lam didn’t want to un­bun­dle its large in­ter­est in Absa to its share­hold­ers. It pre­ferred the un­pop­u­lar step of sell­ing it to Bar­clays plc.

Old Mu­tual has never thought of un­bundling its in­ter­est in its short-term in­surer Mu­tual & Fed­eral – which, in­ci­den­tally, is do­ing as badly as San­tam – to its share­hold­ers. Just like San­lam, it first tried to buy out mi­nor­ity share­hold­ers and now it’s sim­ply try­ing to sell the short-term in­surer.

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