JOHANNESBURG - Price/Earnings ratios below 5 and dividend yields above 10percent are a common phenomenon on the JSE these days.
This also applies for the so-called blue-chip stocks, not something we have not experienced many times in the last three decades. The extreme uncertainty of our current situation, the possible effect on our economy, and companies ability to stand steadfast are all factors to consider when making investment decisions.
With more than 170 years of heritage across sub-Saharan Africa, Old Mutual is a crucial part of the communities it serves and broader society on the African continent.
Following the dislocation in financial markets due to the outbreak of the Covid-19 coronavirus, Old Mutual is now trading at a 60percent discount to its group equity value of close to R25 per share, compared with the 29percent discount from early February, and 15percent from 10 months ago.
Since 31percent of the group’s group equity value is in shareholders’ funds, which is more susceptible to market fluctuations, market returns and investment income will be material drivers of investment return.
The current downside risk from the spread of Covid-19 is a significant headwind, which is likely to impact the morbidity and mortality claims experiences adversely and therefore, the results from operational growth.
Old Mutual’s embedded value is expected to change by approximately 3.9percent, for every 5percent change in the mortality rates; therefore it is likely that the coronavirus will result in a decrease in the embedded value, assuming all else remains the same. Old Mutual’s size and strong liquidity position should help provide some protection relative to peers.
However, the potential impact from a spike in mortality and morbidity experiences, and an increase in lapse rates as a cause for concern which places growth objectives and capital distribution initiatives at risk. The group is targeting a return on Nett Asset Value (RoNAV) of the average cost of equity plus 4percent (approximately 17.4percent. RoNAV for 2019 was 15.2percent; therefore, it could be a challenge to reach the 2020 target.
Before the market crash in March 2020, Old Mutual already traded at a discount. This was potentially due to the overhang created by the managed separation, subsequent exclusion from large developed market indices, the ongoing litigations involving former chief executive Peter Moyo creating managerial uncertainty, and the weak performance of the rand following increases in global trade uncertainty.
Old Mutual faces the potential threat of new entrants into the funeral insurance market (namely Sanlam via the joint venture with Capitec, FirstRand, and Outsurance following the termination of the 13-year relationship of Shoprite with Old Mutual with regards to funeral insurance policies).
Old Mutual has less than 10percent of the unsecured lending market, which provides a significant opportunity to drive future growth.
Entry-level transactional and lending products are advantages over its traditional insurance peers, while strong branding will assist in defending its position from banking peers.
The headwinds, as mentioned earlier, will impact the insurance industry as a whole. Old Mutual will probably be more resilient to economic challenges in 2020.
Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. Old Mutual shares are held on behalf of clients.
BUSINESS REPORT