Old Mutual’s JSE-homecoming muted

Old Mutual’s so-called homecoming was marked with a parade through the streets of Sandton and celebratory events in Malawi, Namibia and Zimbabwe – countries in which the newly-formed company effected secondary listings. Despite the fanfare, its shares elicited a muted response from the market.

Old Mutual Limited (OML), the Africa-focused company spun out of Old Mutual PLC, listed with promises to unlock the conglomerate discount from which PLC suffered and to create value for shareholders.

Shares in the company – comprising the former Old Mutual Emerging Markets assets, PLCs residual interests and controlling stake in Nedbank – debuted at R28.50 and closed at R29.40. Some market participants expressed disappointment with the share price performance, having expected OML to trade north of R30.

Adrian Cloete, a portfolio manager at PSG Wealth, said it is likely that the market is waiting for OML’s stake in Nedbank to be unbundled to 19.9% or for the company’s June results and further interaction with management to get a better sense of the business.

He said that forced selling by index funds, which account for about 20% of shares in the company, may have weighed on the share price. Following PLC’s break-up, the newly formed companies are to fall out of certain indices such as the FTSE100 and MSCI Europe with OML set to be included in the MSCI Emerging Markets Index. Passive managers, which like PLC shareholders also received one Quilter share and roughly three shares in OML for every three PLC’s shares held, are expected to adjust their positions in the stock accordingly.

“Our view is that if the value is compelling enough, investors will, in due course, offset forced selling by the index funds. But this stock must be picked up by active managers,” said Renier de Bruyn an investment analyst at Sanlam Private Wealth.

Per his calculations, OML’s insurance and asset management business is trading at 7.5x P/E, rendering it undervalued relative to its peers and “quite attractive” at its current share price. The calculations take the market value of OML’s full stake in Nedbank, its residual PLC interests and proceeds from its Latin America sale into account.

De Bruyn said PLC’s managed separation should be value accretive for shareholders, who may also benefit from a special dividend following Quilter’s placement and the proceeds from Latin America. He added that the unbundling of Nedbank, expected by year-end, should further crystallise value for shareholders.

But, Just One Lap’s Simon Brown has doubts. Barring the 2008 financial crisis, when shares in PLC fell to R4.40 and that of Nedbank and Mutual & Federal traded at around R4, PLC and Nedbank were out of kilter implying the Nedbank stake was never really reflected in PLC’s share price, he said.

According to him, there is little value left to be unlocked. “We’ve seen an uplift in the PLC share price during the managed separation. Apart from obvious savings [such as the head office costs] and a better strategy, the market knows the story and priced it in so the unlock has already happened”.

He said it is likely that OML’s return to its roots and to a South African market that it knows well may provide some upside. “Ever since Old Mutual went offshore with great ambitions to be a global insurer, it lost its way. Its homecoming is a tacit admission that its offshore jaunt didn’t work. It was fun but with hindsight we can see that it was not a huge success for shareholders.

“But it is coming home to a more competitive and tough environment. The economy is not growing, taxes and fuel prices have increased and the currency is weak. It is going to be tough to sell anything to South African consumers – insurance needs to be sold as opposed to hamburgers which are bought”.

Sasfin’s David Shapiro agreed that it’s returning to South Africa vanquished and not triumphant amid challenging domestic trading conditions. “[The environment] is not easy. It is selling the same products as its competitors and it’s going to be hard to differentiate itself…Only when the economy starts growing and we add jobs will the outlook for financial services improve”.

Moyo said the onus is now on OML to present its case to shareholders, execute its previously stated strategy – based on eight battlegrounds – and prove its worth through solid results. “From today onwards, that share price depends on what we as OML do…Taking on that responsibility has got its own challenges but it also comes with excitement and is invigorating for our people. There isn’t anything that we can do to manipulate that share price it is about how we manage the business,” he said on Tuesday.

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