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Alex Forbes share price hammered on challenged results

Job losses, volatile markets hurts bottom line.

JOHANNESBURG – Alexander Forbes’ share price gave up as much as 13.82% on Monday, after the financial services group said that rising unemployment and retrenchments in its client base hurt profits.

Job losses led to withdrawals in savings, Alexander Forbes – which administers around a quarter of the domestic employee benefits market – said in its results for the six months to September 2015.

Operating profits from continuing operations edged up 2% to R552 million from the prior period, while operating expenses jumped 12%, largely driven by a new accounting method for the group’s long-term share based incentive scheme, as well as investments into technology and new hires in its domestic financial services business.

Alexander Forbes Financial Services South Africa reported operating profit of R175 million, an 8% decline on the prior period. Growth in institutional operating income was limited due to fee pressure, increased retrenchments among its client base and “lower-than-expected new client success in a difficult market,” Alexander Forbes said.

The Retail Financial Services business grew assets under advisement by 9% over the past 12 months to R57.5 billion. Alexander Forbes said that volatile markets have pushed clients to more conservative portfolios, while the economic environment has seen increased withdrawals from retirement funds.

Investment Solutions, Alexander Forbes’s multi-manager, saw margins come under pressure as a result of market volatility. “When markets are volatile, people move from specialised to more balanced portfolios and we’ve seen an increase in this trend,” said Derrick Msibi, the MD of Investment Solutions.

Investment Solutions grew assets under management (AUM) by 6.2% to R318 billion from the prior period. Over the six-month period it suffered net client cash outflows of R4 billion, due to some R7.1 billion in benefit payments and low preservation. Operating profit fell 8% to R180 million.

Msibi said that Alexander Forbes is removing performance fees on some of its portfolios in line with anticipated moves by Treasury in this direction.

Muted results

Alexander Forbes Group CEO, Edward Kieswetter was bullish about the group’s investment into nine additional financial wellness consultants.

“There is a huge opportunity for us to provide products and services to members in the funds we administer. Historically, our relationship has been with trustees and corporates, not with individuals. We’ve had to rewire our own internal DNA to create that access without destroying trust or abusing the privileged information we have,” he told Moneyweb.

He said that the group’s financial planning consultants were managing to engage members who were leaving institutional funds, with the effect that they preserved roughly half their money in the group and kept about a third of that under advisement. Flows from financial planning consultants to Alexander Forbes products increased from 85% to 89% over the period, following investments into and repricing of the product platform in the prior year.

Operating income was “muted by a number of things,” Kieswetter said, including a pedestrian economic growth environment, job losses and volatile market performance. Alexander Forbes administration lost nearly 8 500 members due to retrenchments, but made it up with new members.

The depreciation of the rand against the sterling was favourable, Kieswetter said, as partnership earnings from its UK and European business – Lane Clarke & Peacock – helped buoy profits.

Liam Hechter, investment researcher at Anchor Capital, said the results were disappointing, considering that Alexander Forbes’s core businesses should provide an inflationary hedge, since salaries increase in line with inflation. “We would expect operating profit growth in the region of 7% to 9%,” he said. “Margins are under pressure and growth is going to be hard to come by”.

Alexander Forbes declared an interim dividend of 15 cents per share. Hechter said that Anchor Capital was expecting closer to a 40c dividend for the full year. 

 

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