Old Mutual has a diverse investment portfolio with significant stakes in listed and unlisted companies. The group underwent a separation, which resulted in two new listed entities, Old Mutual Limited and Quilter plc. Old Mutual contains the emerging market operations and a 19.9percent stake in Nedbank. Quilter consists of the group’s wealth business in the UK.
Old Mutual’s primary operations are in South Africa and Africa. With more than 170 years of heritage across sub-Saharan Africa, the group is a crucial part of the communities it serves and broader society on the continent.
Several management actions and initiatives were taken last year to drive performance in a harsh economic environment. Within the Personal Finance division (contributing 20percent of profits), the group re-priced guaranteed annuity products and made tactical improvements to the pricing of disability and severe illness to improve competitiveness.
Old Mutual Corporate (17percent contribution) earnings will continue to be impacted by market levels this year. Management expects headwinds within the insurance division if a normalised claims environment returns. This year is expected to be politically stable in the African countries, currently contributing about 13percent of profits.
The uncertainty in Zimbabwe is likely to remain, while the peace deal signed in South Sudan recently should result in an improved economic environment. Strong growth is expected in the relevant eastern and western African markets. The continued weak economy in South Africa along with the lower-than-inflation-average salary increases, fuel price and VAT increases have adversely impacted disposable income, and as a result, customer acquisition and retention.
The group is trading at a 15percent discount to its group equity value of 2575c per share. Since the majority of the group’s embedded value is in shareholders’ funds, which is more susceptible to market fluctuations, market returns and investment income will be the primary drivers of investment return.
It seems like the downside is limited at the current valuation multiple, and improved capital management with excess capital being returned to shareholders is likely to justify an improved valuation in future. The group is targeting a return on assets (ROA) of the average cost of equity plus 4percent (about 17.4percent). ROA for the 2018 financial year was 18.6percent, therefore beating their target.
The discount at which the group is trading is potentially due to the overhang of shares created by the managed separation and the subsequent exclusion from large developed market indices.
As a result, the next 12 months may provide significant room for re-rating relative to the rest of the South African insurance sector. The potential special dividend from the proceeds of their Latin American businesses could support a yield ahead of 5percent for 2019.
Additionally, the share price is likely to be supported by their share buyback programme.
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.