Digital Transformation And Sustainability Will Reshape Financial Services

Key Takeaways

• The launch of OM Bank and digital transformation initiatives are key growth drivers, enhancing revenue and net margins through efficient cost structures and operational efficiencies.
  
• Strategic acquisitions, niche market expansion, and sustainable investments diversify income streams and align with ESG trends, supporting revenue growth and shareholder value.
  
• Persistency issues due to weakening consumer disposable income could threaten future earnings stability and VNB margin.

Catalysts

Provides financial services primarily in South Africa and rest of Africa.

• The launch of OM Bank as a fully digital-first bank represents a significant growth catalyst for Old Mutual. It will leverage existing customer bases and offer integrated financial solutions, likely driving future revenues and improving net margins due to efficient cost structures.
  
• The ramp-up of digital transformation initiatives, including the decommissioning of legacy systems and increased digital user engagement, is expected to enhance operational efficiencies and reduce costs, thereby positively impacting net margins and earnings.
  
• Sustained focus on strategic acquisitions and expansion in niche insurance sectors, as evident in the growth of the Blue Sky portfolio, is set to bolster revenues and diversify income streams, providing a buffer to net margins against economic volatility.
  
• The improved performance in Old Mutual Insure, with its underwriting margin exceeding target ranges, suggests that strategic pricing adjustments could continue to lift net margins, provided favorable conditions persist.
  
• Continued investment in sustainable initiatives and products, like the green economy and renewable energy, not only aligns with ESG trends but also positions Old Mutual to capture growth opportunities, potentially boosting revenue and enhancing shareholder value.

Old Mutual Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Old Mutual's revenue will decrease by 55.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.3% today to 92.6% in 3 years time.
• Analysts expect earnings to reach ZAR 8.4 billion (and earnings per share of ZAR 1.96) by about September 2028, up from ZAR 7.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ZAR10.6 billion in earnings, and the most bearish expecting ZAR6.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.1x on those 2028 earnings, up from 7.4x today. This future PE is greater than the current PE for the GB Insurance industry at 9.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.49%, as per the Simply Wall St company report.

Old Mutual Future Earnings Per Share Growth

Risks

• Despite strong earnings growth, persistency issues due to weakening consumer disposable income could negatively impact future earnings stability and the VNB margin.
  
• The deterioration in the credit loss ratio, particularly in Old Mutual Finance with an impairment in the secured loan book, poses risks to net margins and overall profitability.
  
• Prolonged macroeconomic instability, like inflationary pressures and weakened currencies in African regions, could adversely affect revenue and hinder earnings growth outside of South Africa.
  
• The bank's initial investment losses and the risk of it not breaking even until 2028 could mean substantial pressure on net margin and earnings in the short to medium term.
  
• Continued currency instability and regulatory challenges in Zimbabwe could impede access to earnings and impact both group revenue and equity value.

Valuation

• The analysts have a consensus price target of ZAR13.181 for Old Mutual based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR17.5, and the most bearish reporting a price target of just ZAR9.9.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR9.1 billion, earnings will come to ZAR8.4 billion, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 18.5%.
• Given the current share price of ZAR13.29, the analyst price target of ZAR13.18 is 0.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.