Op­por­tu­nity or dis­as­ter of the year

An­a­lysts fear what might come next

Finweek English Edition - - Companies & Markets - » SHAUn HAR­RIS

WHAT WE DO know is that by the yearend – also the end of Old Mu­tual’s fi­nan­cial year – South Africa’s largest life in­surer and wealth group is go­ing to look very dif­fer­ent. How dif­fer­ent we don’t know, or even if Old Mu­tual is go­ing to sur­vive without be­ing bro­ken up and sold (a likely prospect for its over­seas plc op­er­a­tions).

Right now an­a­lysts are grap­pling with three ques­tions: how much of Old Mu­tual will have to be sold, what fur­ther losses and write downs can be ex­pected and will it main­tain, re­duce or per­haps not even pay a div­i­dend in its cur­rent fi­nan­cial year?

In a Pan Europe re­search re­port by James Pearce, of Cazen­ove, the out­look is bleak. “The board hasn’t ad­dressed the strat­egy which has gen­er­ated an ap­par­ently un­man­age­able group, and we be­lieve that fur­ther neg­a­tive sur­prises will fol­low,” Pearce writes.

That echoes the dark, off-the-record mum­bling of a few an­a­lysts here at home, who say there will be fur­ther write-downs – they just don’t know how much. It’s be­lieved the full ex­tent of pos­si­ble loss ex­po­sures in the United States have not yet been fully re­vealed by Old Mu­tual, if in fact they are

even yet fully aware of pos­si­ble li­a­bil­i­ties.

“Part of the prob­lem has be­come Old Mu­tual’s pri­mary list­ing in Lon­don, where an­a­lysts gen­er­ally don’t like life in­sur­ers,” says Paul Ste­wart, MD of Plexus, an as­set man­ager that’s been closely mon­i­tor­ing fi­nan­cial shares for some time. Ste­wart ad­mits Old Mu­tual could be­come a take­out tar­get but is quite op­ti­mistic on the share. “I think there’s an op­por­tu­nity. Ev­ery man and his dog hates the share now – but on an em­bed­ded value ba­sis there’s value.”

Ste­wart is re­fer­ring to the poor per­for­mance of its share price. Strip­ping out div­i­dend pay­ments – at around 1240c/share by the mid­dle of last week – Old Mu­tual is back at its list­ing on the JSE 10 years ago fol­low­ing its de­mu­tu­al­i­sa­tion. And that through one of the strong­est bull mar­kets the JSE has seen.

Cazen­ove isn’t as char­i­ta­ble. “We as­sume the US$250m of fresh cap­i­tal in­jected into the op­er­a­tion (the trou­bled US Life ex­po­sure to Ber­muda) in the sec­ond will be lost too, along with an equiv­a­lent amount of clo­sure costs or loss on dis­pos­als and or rein­sur­ance.” The con­clu­sion? “Al­though the stock looks su­per­fi­cially in­ex­pen­sive, we doubt that Old Mu­tual’s trou­bles are over; and in any case the new CEO (Ju­lian Roberts, who re­placed Jim Sut­cliffe) will prob­a­bly have to take un­palat­able re­me­dial action in the US at year-end. Ac­cord­ingly, we down­grade our rat­ing from in line to un­der­per­form.”

The pity is that Old Mu­tual SA still looks pretty vi­brant and is a pow­er­ful brand in the lo­cal mar­ket. There have been botches in the past, notably at bank­ing sub­sidiary Ned­bank (its prof­its col­lapsed in 2003, fol­lowed by a R5,2bn rights is­sue), but it’s still one of the coun­try’s lead­ing life com­pa­nies.

What’s the next bad sur­prise?

Ju­lian Roberts

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