Old Mu­tual

The prospects are en­cour­ag­ing for Old Mu­tual, but the group will have to start think­ing about break­ing up its oper­a­tions.

Finweek English Edition - - NEWS - ed­i­to­rial@fin­week.co.za By Sarine Barnard Sarine Barnard is an an­a­lyst at In­vestec As­set Man­age­ment.

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

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