The prospects are encouraging for Old Mutual, but the group will have to start thinking about breaking up its operations.
over the years, Old Mutual has made many attempts to diversify geographically, but despite these efforts the business is still largely South African. Approximately 62% of the adjusted operating profit comes from South Africa, while a quarter of the operating profit is generated in the UK and the rest in Europe, the US and the rest of Africa.
Today the group basically consists of four parts: the emerging-market business (which contributes 40% to the embedded value), its 54% stake in Nedbank (contributing approximately 32%), the UK wealth business (contributing 20%) and the US-listed Old Mutual Asset Management (with 8% contribution).
We are encouraged by the company’s prospects. Old Mutual’s South African life insurance business is a market leader in the entry-level market and it has started to claim back some of its market share losses suffered in the affluent business segment over the last few years. Nedbank has a strong corporate franchise in South Africa and it continues to make progress in rebuilding its retail franchise.
Old Mutual has furthermore transformed its UK wealth business into a vertically integrated wealth and asset management business that is very well positioned to benefit from the structural shifts happening in that market. This business has attracted strong net cash flows over the past couple of reporting periods and we expect this to continue.
Relative to many parts of the SA equity market that are suffering from earnings downgrades at the moment, Old Mutual’s earnings in rand have actually been revised upwards over the past six months. The foreign earnings have benefitted from the rand’s weakness, and the resilient net flows in the UK business have also helped. We believe the UK wealth business will support further earnings revisions in the future.
The share is priced attractively with a dividend yield of approximately 4.6% for December 2015, and growing between 9% and 11% per year. The company trades on a price-to-earnings ratio of 11.4 times on 2015 earnings that compares very favourably to the South African market multiple of 17.7 times, as well as the average for the local listed insurers of 14 times and 15.7 times for European life insurers.
We also think there is a unique opportunity to unlock shareholder value by listing its British operations separately. Breaking up the group is going to become more of an economic necessity with the new solvency regime in Europe, which will penalise Old Mutual’s excess capital held in SA. The headline group solvency position will therefore, on the face of it, appear weaker than that of its UK and European peers, even though all the underlying operations are in fact very well capitalised.
Listing the British business separately and bringing the emerging market business back to its roots would also align the shares better to stakeholders that would be interested in the different pieces. At the moment, Old Mutual is not part of the MSCI Emerging Market Index, due to its London listing. It therefore doesn’t attract flows from emerging market funds, despite the fact that 70% of its business comes from emerging market sources.
UK fund managers don’t like the complexity of the group or the large exposure to an emerging-market currency. The UK wealth management business will, however, attract interest from UK investors, as other UK wealth management peers trade at very attractive multiples, ranging from 19 times for Rathbones (which is a pure wealth manager) to up to 32 times for St James Place (a business with a focus on the high-net-worth segment through agency distribution). We believe the sum of the parts for Old Mutual will certainly be worth more than the whole.
The company headquarters of Old Mutual in London