Questor says SELL
Old Mutual [LON:OML], the South African-based financial group, saw its shares surge almost 9pc yesterday as some stability returned to the country’s government following the appointment of a new finance minister.
However, the shares hold little attraction as they remain highly exposed to weaker emerging market economies and febrile equity markets.
South African troubles
Shares in Old Mutual tumbled to a three-year low last week after South African president Jacob Zuma sacked finance minister Nhlanhla Nene. Mr Zuma has appointed Pravin Gordhan as his third finance minister in less than a week – previous incumbent David van Rooyen had only been in the job since Thursday. Mr Gordhan previously held the role from 2009 to 2014.
The collapsing currency and political instability underlines the endemic problems in the South African economy, which remains heavily reliant on commodities.
Emerging market focus
Old Mutual was founded by a Scotsman in Cape Town in 1845, but moved its base to London in 1999. The firm is dual-listed in the UK and South Africa.
Old Mutual generates about half of its profits from its banking operations under the Nedbank brand, which in turn is almost entirely focused on lending to corporates across South Africa and the wider continent. Once you add in the asset management and life insurance operations, the profits generated from South Africa rise to about 70pc of the group total.
Old Mutual has made efforts to diversify away from the sub-continent. The acquisition of UK investment manager Quilter Cheviot was completed in February, and the group still retains a 78pc stake in its US asset management business that was floated last year.
Meanwhile, the UK investment management unit was bolstered through the hiring of Richard Buxton from Schroders in 2013. The other issue for investors is the exposure to South African equity markets. Analysis from broker JP Morgan Cazenove shows that the South African life insurance industry as a whole had its highest allocation to equities and lowest cash balances at the end of 2014.
The doubling of South African equity markets during the past six years has driven returns. However, the South African market has fallen about 17pc from highs seen in August, and is now flat for the year to date.
Old Mutual is shaking up its management team to face the challenges. Bruce Hemphill, the head of wealth and insurance at Johannesburg-based Standard Bank, will replace Julian Roberts as chief executive. Earlier this month Old Mutual named Trevor Manuel, South Africa’s former finance minister, as its next chairman.
Old Mutual is performing well, with recent acquisitions and strong demand from retail investors in South Africa helping the group report a 31pc rise in sales to £8.1bn for the three months to the end of September. However, investor concern and falling equity markets led to an £11bn fall in assets under management to £319bn.
The shares might look like good value, trading on 10 times forecast earnings and offering a 4.7pc prospective dividend yield, but Questor is concerned about the focus on emerging markets and what happens when US interest rates begin to rise. Sell.