Insurance, banking and asset management giant Old Mutual (LSE: OML) presents us with something of a ‘special situation’ when it comes to investing. The firm is pursuing a strategy of ‘managed separation’ of its business units into standalone companies, working on the theory that the sum of the parts is greater than the whole. Right now, the firm is a conglomerate, which creates operational inefficiencies, arguably causing the stock market to mark the firm’s valuation down.
Enhanced value and good results
Like doves being released from a cage, the newly created individual companies will be free to soar under new, unrestrained and invigorated management teams, delivering value to Old Mutual’s current shareholders. It’s a good theory and a powerful reason to hold the stock now, especially considering the great full-year results released today.
Compared to 2016, pre-tax adjusted operating profit moved up 22% last year and adjusted earnings per share lifted 25%. The directors displayed their confidence in the outlook by pushing up the full-year dividend by 17%, which is great progress for existing shareholders. Yet, despite these good financial figures, Old Mutual experienced challenging macroeconomic conditions in its largest market of South Africa through 2017, with “weakness in consumer and business confidence creating a tough environment for banking, long-term investment and savings.” Meanwhile, in the UK the company said it delivered a “resilient operational performance” despite a weak currency, political uncertainty around Brexit and the general election, and regulatory developments affecting financial services.
The firm is on course to complete most aspects of the managed separation of its businesses by the end of 2018. Chief Executive Bruce Hemphill said in today’s report: “The process has already delivered significant value through cost and debt reduction.” The aim is to “unlock and create significant long-term value” for shareholders, which he believes is “trapped” in the group structure. The separation should remove costs layered in the existing set-up.
Attractive valuation
Three underlying businesses will be set free — Old Mutual Emerging Markets, Nedbank and Old Mutual Wealth. OM Asset Management was the first division to go, having been separated from the firm during 2017. I think the strategy is a good example of how imaginative management thinking can turn a dull old firm into an interesting-looking investment proposition.
Meanwhile, even in this advanced stage of change the valuation still looks attractive. In 2017, the adjusted net asset value per share rose 6% to around 242p, which is close to the current share price of 252p. The price-to-earnings ratio sits just above 10 and the dividend yield around 2.8%, with the payment covered almost three-and-a-half times by current earnings. This does not strike me as a demanding valuation.
Good trading and the impetus created by the company’s bold separation strategy have combined to drive the stock up around 35% since November, and I reckon there could be more to come from capital appreciation and dividend income for investors willing to embrace the uncertainty of the company’s current state of flux. Perhaps this is one to tuck away for your retirement fund.
