Market weakness compounds misery for limping Liberty
● The first six months of the year have not been a walk in the park for Liberty as the group dealt with a data breach, but the poor performance of the JSE and the weak economy may be of greater concern to the financial services group.
Analysts expect the hack to have had a limited effect on upcoming interim results to end-June, due to be released this week. Last month Liberty announced that its IT infrastructure had been breached and hackers had stolen data from the group. The full scale of the breach has yet to be revealed.
The group is in the midst of a turnaround strategy, which it began in 2017 in an attempt to refocus its business in the South African market and regain lost market share from its competitors.
Avior Capital Markets analyst Warwick Bam said he was not expecting any one-off losses in the results this time. “So if there are any additional surprises, that would be a disappointment, especially at Stanlib in both the South African and rest-of-Africa business,” said Bam.
Over the past couple of reporting periods Stanlib, Liberty’s asset manager, has been one of the main contributors to the group’s losses. The investment side of the business is taking strain as equity markets have come under pressure in recent months.
The JSE All Share has fallen 4.3% year to date. The decline has been driven by a combination of fear over a pending trade war between the US and a number of countries and tightening monetary policy in Europe and the US. Those factors have affected emerging-market assets including equities, bonds and currencies such as the rand.
In an operating update issued in May, Liberty said assets under management at Stanlib’s South Africa business declined from R556-billion at the end of December 2017 to R543-billion. Liberty said this was due to lower investment market returns for the quarter.
But Bam said the market was pricing in the performance of the JSE All Share Index as it is a big chunk of Liberty’s earnings. Liberty’s share price is down by 8.5% this year.
Headwinds
Adrian Cloete, a portfolio manager at PSG Wealth, agreed that Liberty faced considerable headwinds from the JSE performance that would come through in its interim results. But Cloete added that Liberty was coming off a low base as its performance in previous years has been poor and so operational earnings overall should be up.
“They are doing the right things and as soon as that comes through in the results you will see the recovery [in the share price] coming through.
“It’s taking slightly longer than the market expected, but I think the market is also being unrealistic,” Cloete said.
He said the focus for investors and the group’s board was Liberty gaining market share and an improvement in the margins on its individual life products. Cloete said Liberty had to manage its sales forces efficiently, but at the same time it needed to attract more new business.
The market would also be looking for the results of further integration with Standard Bank, which has a majority stake in Liberty.
In its 2017 results for the year to December, Liberty showed some areas of improvement in certain businesses such as individual arrangements that are responsible for its risk and health insurance and investment solutions products, but the group’s performance in its operational update was mixed.
In its May operating update for the first quarter, new business in its retail insurance operations was down 3% compared to the same period last year.
But the group was able to reduce policy surrenders and maturities, which positively impacted net cash inflows.
Liberty’s individual investment platform was able to increase gross new business by 19%, attracting R545-million of gross new business inflows compared to the same period last year.
Bam said the business may have underinvested for a period and that in itself would delay the turnaround.
How long the turnaround will take remains an open question, and, Bam said, “that is what we really want to hear from [CEO David] Munro — what is the status of the business?”