Old Mutual presented a solid set of interim results for the six months to end June, but the always-sceptical market didn’t seem too thrilled – the share price was one of the biggest losers on Tuesday, dropping by more than 8% versus the JSE overall index falling by only around 0.5%.
The formal numbers show that profit after tax increased by more than 67% to R5.6 billion in the half year, compared to just short of R3.4 billion in the comparable prior period. Management points out that results from operations improved by 87% over the last year.
In addition, Old Mutual CEO Iain Williamson told shareholders during a presentation of the results that the group made good progress on its strategy of recovering, simplifying and amplifying the business.
“We have largely completed the recovery and the process of simplifying operations. The focus shifted to amplifying and building on our strengths,” says Williamson.
Reporting on the list of promises Old Mutual management made to shareholders and investors some three year ago, he says management delivered on most of the commitments and exceeded many, while work on the others is on track.
Management believes it was successful in changing the trajectory of customer experience when dealing with Old Mutual – adding additional digital claims channels, regaining its competitive advantage in mass market clusters, and improving investment performance.
Williamson says investment returns were the “best performance figures in probably a decade”.
“Over a one-year period, 94% of our funds performed better than their respective benchmarks and 81% performed better than the benchmarks over three years.
“We are also on track to deliver on the promise to realise R750 million in cost savings in 2022.”
Williamson says the improvements in operations and financial results were achieved during a very challenging period, still impacted by Covid-19 and the Russian invasion of Ukraine.
“The macroeconomic environment presented big challenges in that rising inflation impacted on people’s disposable income. Real income in SA declined by 7.8%, impacting on their ability to save, invest and repay loans. Producer price inflation is even higher, running at 15% to 20%, which affects our short term insurance businesses with regards to motor vehicle claims.”
Bank of America Securities analyst Andrew Sinclair, says Old Mutual delivered solid results.
“Old Mutual’s results came in the middle of pre-release ranges, with results from operations comfortably ahead of prior expectations.
“Results from operations at R4.097 billion for the first half were almost double the depressed results due to Covid-19 last year, beating our forecast (by 14%) and consensus (by 5%),” says Sinclair.
He says Old Mutual has not used much of the provisions set aside to pay excessive claims due to the pandemic.
“The company has not yet released any of the conservative Covid provisions, despite little being utilised in the year to date.
“This detail was comforting, as these provisions have not been released to boost profitability. We think this leaves Old Mutual well placed to tackle any challenges ahead,” says Sinclair.
He notes that Old Mutual used only R292 million of the R2.8 billion worth of provisions, retaining R2.57 billion.
“We think this provision looks increasingly prudent and its release could support future results. But retaining the provision is a sensible move in a challenging backdrop.”
So what’s with the share price?
The good results and strong balance sheet do seem to raise the question of why the share price is stuck at low levels.
At not quite R11 per share, it is barely above its low of R9.97 in March 2020 when the announcement of severe pandemic restrictions on doing business caused share prices to crash.
“Building a track record of steady, clean results can help Old Mutual rerate from its current depressed valuation,” says Sinclair, noting that Bank of America Securities gives the share a buy recommendation with a target price of R15 per share.
Old Mutual financial executive Casper Troskie also referred to the low share price during a presentation of the results, saying the share is trading at a big discount to the group’s embedded value.
Old Mutual calculated the group’s total equity value at R87.4 billion, compared to its market capitalisation (at the end of June) of R51.9 billion.
But why? The discount of more than 40% seems out of kilter with the good results.
Troskie didn’t speculate on the reasons, nor did he say whether Old Mutual is concerned enough about the discount to try to rectify it.
The life insurer has proved that it is willing to act. After all, it unlocked value by distributing its interest in Nedbank to shareholders last year.
Williamson mentioned in passing during the questions and answer session following the presentation of the results that Old Mutual might also consider a share buyback.
Listen as Taskeen Ismail of Old Mutual explains who qualifies for Old Mutual’s Bula Tsela empowerment shares (or read the transcript here):