Weak H1 for Liberty

GROUP EARNINGS: STILL SEEN BOUNCING BACK OFF LOW BASE

Earnings dragged down by significantly weaker investment market returns.

Liberty Holdings’ disappointing interim results may prompt analysts to cut their full-year (FY) earnings forecasts. However, its annual earnings are still expected to rebound quite strongly, albeit off a low base.

Liberty Holdings reported a 30% decline in normalised headline earnings per share (Heps) to 456.7 cents for the six months ended June. Despite warnings of continuing challenging operating conditions in May and that interim normalised Heps would likely fall 25% to 35% in July, the first half (H1) announcement appeared to disappoint. Its shares closed 6.06% lower on Friday, at R105.50 per share.

Liberty’s H1 performance, coupled with challenging operating conditions, makes it “reasonable to assume the percentage increase in FY 2017 earnings will be less than analysts were expecting earlier”, said PSG Wealth portfolio manager Adrian Cloete.

“After today’s weak H1 result it is very likely that sell-side analysts will reduce/downgrade their FY earnings expectations, but the analysts are still likely to indicate an earnings increase for FY 2017 as the FY 2016 base is low.”

I-net and Reuters polled analysts: for now the consensus for FY 2017 normalised Heps is 1 412 cents and 1 322 cents respectively. It reported normalised Heps of 904.5 cents for the FY to December 2016.

Analysts appear to have been consistently reducing earnings

After today’s weak H1 result it is very likely that sell-side analysts will reduce/downgrade their FY earnings expectations.

forecasts for 2017 and 2018 since March. Liberty reported FY for 2016 in late February; a surprise Cabinet reshuffle, giving rise to sovereign ratings downgrades, took place in March.

Cloete said the market also expected a group equity value number. Its normalised group equity value (GEV) per share fell 2% to 14 316 cents from 14 586 cents in December. “The normalised GEV per share is the main driver of the long-term share price, so when the market becomes more confident about the turnaround Liberty’s share price will be more correlated to this metric again.”

Liberty’s earnings were dragged down by significantly weaker investment market returns, cutting shareholder investment portfolio returns 37% to R453 million. It reported a 17% decline in individual arrangements (SA retail operations) as a higher new business strain and modelling changes came to bear. Indexed new business grew 4% but the new business margin fell from 1.6% to 0.4%.

Stanlib SA’s earnings more than halved to R115 million, due to margin pressure from lower market returns and product mix. Total assets under management grew R5 billion to R540 billion and net customer cash inflows improved, amounting to R5.6 billion versus outflows of R900 million previously.

Adrian Cloete PSG Wealth portfolio manager