Tough times not over for Old Mutual

When announcing fairly good results for the financial year to December 2019, Old Mutual management warned shareholders that 2020 will be way tougher than the already difficult past 12 months as the global outbreak of Covid-19 is bound to affect the group and its clients.

Interim CEO Iain Williamson told shareholders that Old Mutual faced challenging macroeconomic conditions in SA and in many of the other African countries in which the group operates. “This put pressure on the disposable income levels of our customers and on the ability of our businesses to grow value for our customers and investors.”

Read: Zimbabwe restricts trading of Old Mutual, two other shares

Williamson points out in a presentation to stakeholders that the SA economy grew by only 0.2% in 2019.

Nevertheless, Old Mutual reported an increase of 5% in headline earnings and an increase of 7% in headline earnings per share (EPS) after adjusting figures for the unbundling of Nedbank and Quilter plc towards the end of the 2018 financial year. Headline EPS increased to R2.09 compared to the adjusted figure of R1.95 in 2018.

Williamson says the 5% growth in earnings is mostly due to strong investment returns in SA. Earnings benefited from a modest increase in share prices in 2019 with management mentioning that share prices were for the most part lower during 2019 than in 2018.

Operating costs down

The small increase in share prices – less than 6% – boosted the values of policyholders’ investments, as well as the management fees for Old Mutual. But it was mostly a big reduction (R1.2 billion) in operating costs than delivered the growth in earnings.

The initial target to cut costs by R1 billion was exceeded, mostly by developing digital platforms to grant clients direct access to investment portfolios, as well as the introduction of 151 ‘robots’ that saved time and costs.

Herein lies the conundrum for Old Mutual when considering its prospects for 2020: the exercise to reduce operating costs has delivered most of its benefits and the stock market has had a horrible start to the new year.

Share prices have crashed by around 30% since the beginning of January, which will have a pronounced effect on Old Mutual’s fee income.

Read: Old Mutual to shut its two resource sector unit trusts

Old Mutual still stuck to the forecast that the economy will grow by 0.8% in 2020, a figure that most economists are probably taking a hard look at right now following the events of the past two days. Old Mutual blames electricity disruptions for the prospects of low growth and mentions that growth remains dependent on government’s ability to address high unemployment rates and the financial mess of state-owned enterprises.

Moving target

In fact, things changed have dramatically since the people at Old Mutual prepared the results. The JSE dropped another 10% on Monday morning while Williamson and his management team were busy discussing the past year and the outlook for the 2020 financial year.

Most universities and other tertiary educational facilities announced on Monday morning that they will also suspend activities after the announcement Sunday evening that government is closing schools.

The cancellation of sporting events, concerts and the immediate reduction in tourist numbers are sure to affect the economy gravely, as will the decrease in demand for commodities.

Higher, rather than lower, unemployment and a decrease in income levels is probably on the table for SA this year.

Old Mutual warns that it is anticipating a difficult year and says it probably won’t meet its long-term target to grow operational earnings at the rate of increase in GDP plus 2%.

Management says it will monitor the coronavirus outbreak on a daily basis to ensure the safety of its employees and clients.

“We also model the impact of ‘perfect storm” scenarios on our solvency capital and liquidity levels. These stress tests have shown that we remain sufficiently capitalised with appropriate liquidity levels through these scenarios.”

Hopefully, investors in all the underlying investment products and policies, as well as shareholders, will take a long term view and ride out this difficult year.

Read: Manuel happy to move on from Moyo drama

Old Mutual dropped by more than 16% yesterday to close as just above R12. The latest EPS put the share on a price-earnings ratio of only 5.8 times, even lower than the low levels of around 7 times since the unbundling of Quilter and Nedbank and the fiasco of the still unfinished termination of the previous CEO.