Persistently Weak Sales and Client Outflows Will Pressure Revenue for Years to Come

Catalysts

About Old Mutual

Old Mutual is a diversified financial services group providing insurance, investment, and banking products primarily across Southern Africa.

What are the underlying business or industry changes driving this perspective?

• Persistently weak growth in key business lines such as Life APE sales, with guaranteed annuities down close to 40 percent and recurring premium sales only seeing a slight uptick, will likely pressure revenue growth in future periods.
• Ongoing client cash outflows and muted inflows in wealth and investment products point to potential long-term challenges in client retention and fee income. This may place strain on future net margin expansion.
• Loan growth in Old Mutual Finance has slowed dramatically from earlier reported addition rates. Current figures indicate a sharp decrease in daily new client accounts and a flat loan book, which creates concerns for long-term earnings growth in banking operations.
• Increasing competition and persistency challenges in the insurance retail segment are causing a deceleration in gross written premium growth. This threatens the topline and ultimately net profit margins.
• Macroeconomic pressures, such as heightened capital requirements due to rising equity market stress, are diminishing solvency ratios. This may limit the company’s capacity for future buybacks or investment and add volatility to reported earnings.

Assumptions

This narrative explores a more pessimistic perspective on Old Mutual compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Old Mutual's revenue will decrease by 74.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.1% today to 348.5% in 3 years time.
• The bearish analysts expect earnings to reach ZAR 6.2 billion (and earnings per share of ZAR 1.67) by about December 2028, down from ZAR 6.5 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as ZAR10.0 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.6x on those 2028 earnings, up from 9.1x today. This future PE is greater than the current PE for the GB Insurance industry at 9.9x.
• The bearish analysts expect the number of shares outstanding to decline by 0.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.73%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Old Mutual Insure has reported sustained positive underwriting margins and retail gross written premium growth. This could signal resilience in core insurance operations and support a recovery in future net profit margins.
• Improvements in client retention and positive trends in persistency or lapse experience, particularly if management actions drive further enhancements, have the potential to support higher recurring fee income and provide buffers to revenues over the long term.
• The expectation of normalization at the top end of updated margin ranges, along with strong investment performance despite capital market volatility, could enable earnings stability or outperformance against negative forecasts.
• Old Mutual’s asset management businesses could benefit from strong market performance and elevated assets under management, leading to accelerated earnings growth and greater resilience in overall profitability.
• Planned operational execution of buybacks, cost management, and successful lending book stabilization or growth in banking may improve shareholder returns and bolster earnings beyond current bearish outlooks.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Old Mutual is ZAR9.9, which represents up to two standard deviations below the consensus price target of ZAR14.26. This valuation is based on what can be assumed as the expectations of Old Mutual's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR18.22, and the most bearish reporting a price target of just ZAR9.9.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be ZAR1.8 billion, earnings will come to ZAR6.2 billion, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 16.7%.
  
• Given the current share price of ZAR13.88, the analyst price target of ZAR9.9 is 40.2% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.