Keep a close watch on Liberty, analysts warn investors

Liberty failed to ease concerns about the future of the 50-year-old insurer founded by business doyen Donald Gordon at its results presentation on Friday.

Faced by a weakening economy and internal management problems, the group controlled by Standard Bank group has experienced a drop in share price of more than a third from its peak almost two years ago.

The insurer reported a 38% fall in annual earnings.

Better communication of the existing strategy would go a long way towards boosting investor confidence, said Jason Weir, a trader at BayHill capital. "They are taking steps for the longer term, but may need to start focusing on the immediate future more thoroughly than originally set out, given the slower growth conditions prevailing in the global market."

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The direction Stanlib is taking has been of particular concern. Changes to management have been quietly made, taking the market by surprise.

Analysts say this raises a red flag about the business's hiring practices. "The board would need to monitor more closely the likes of their Stanlib business model going forward as well as the calibre of the compliance teams and management involved," said Weir.

Stanlib's CEO, Seelan Gobalsamy, has been redeployed to head the company's emerging-markets division. He will stay on as CEO until a replacement is found for him.

Stanlib's assets under management make up 86% of the group total. The effect of the outflows in the business resulted in a 1% growth in assets under management compared with the previous financial year's.

Stanlib's retail and institutional cash inflows were down 39% on the previous financial year's.

Particularly of concern are its operations in Kenya. The group has made changes to Stanlib Kenya's management after operational issues relating to impaired bank exposures. "Client money was invested in instruments that were exposed to second-tier banks in Kenya, which subsequently became illiquid."

Liberty said it had taken steps to ensure that the Kenyan business was on a good footing.

Weir said the revelation of mandate breaches in the business pointed to problems with the group's hiring processes. The company needed to look at the problems in Kenya from the ground up and not just from a managerial perspective as the flaws in the Kenyan business seemed inherent throughout.

Liberty CEO Thabo Dloti confirmed there had been several dismissals as a consequence of these breaches. However, this simply presented yet another management change, which Preston said was becoming too commonplace.

Dloti, who expanded on the group's strategy outside of South Africa, touched on initiatives and opportunities in Nigeria, where the business is looking at acquiring a 75% stake in a Nigerian long-term insurer, the name of which was not disclosed.

Weir said that whether the move into Nigeria was underpinned by a change in growth strategy or a plan slowly coming to fruition, stepping back and taking a look at the bigger picture was important.

"Shareholders should keep in mind that Africa is a tough continent to do business on as we've so clearly seen with MTN over the last two years."

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The South African economy was not particularly great for insurers at the moment, but Liberty's problems went beyond the macroeconomic background it operated in, said Brad Preston, chief investment officer at Mergence. "A lot of their funds have been performing at the bottom of the league tables," he said.

Analysts would prefer that Liberty focus on stabilising its core South African operations rather than doubling down on expansion efforts in the rest of Africa, where markets may have higher economic growth rates but also challenges of their own.

Weir said investors should keep a close eye on the merger and acquisition activity happening in the firm. "Investing and taking up large stakes in external companies to possibly mask current internal core business flaws is one of the oldest tricks in the book when it comes to the engineering of a balance sheet," said Weir. He said that it might not be the case at Liberty, but it was still worth keeping an eye on closely.

Standard Bank, which owns more than 53% of Liberty, has been quiet about its subsidiary's performance. With the parent company's results coming out next week, Preston said it would be "interesting to see what they have to say regarding Liberty's performance".