The financial results that Alexander Forbes announced for the six months to September played second fiddle to what can be seen as a dire warning from the investment group’s management – that job losses are continuing due to the economic devastation of the Covid-19 pandemic.
A sober message from CEO Dawie de Villiers’ presentation to shareholders on the results for the first half of the financial year was that Alexander Forbes’s investment management and administrator businesses experienced first-hand the stress and uncertainty that people are facing at the moment.
Official figures show that millions of jobs were lost during the first six months of 2020, and Alexander Forbes presented figures showing that job losses are still increasing. While some 15 000 members left their retirement funds in the first six months due to job losses does not sound like a big number, the month-to-month increase is concerning.
Members opting out of retirement funds
One of the slides in the presentation shows that the number of members opting out of their retirement funds as a result of losing their jobs has been increasing steadily – from the ‘normal’ rate of around a few hundred per month to thousands by September.
In June, 1 710 people cashed in their retirement savings due to suddenly finding themselves unemployed, rising to more than 4 000 people losing their jobs in July. Another 3 386 were retrenched in August and then 4 613 in September.
Once again, of importance is not the relatively low number of 15 000 of Alexander Forbes’ total client base – admittedly very important if you are one of them – but the real issue is that the numbers are still increasing.
A few remarks by De Villiers on the subject are noteworthy. “We are starting to see the impact of retrenchments filter through to our client base,” he warned.
“It is certainly not the end,” says De Villiers. “We have seen retrenchments flattening off a bit in October and November, but it will probably continue for the next six months.”
He added that “not a lot of assets are flowing out” as a result.
This indicates that the retrenchments are not in the ranks of employees sitting on millions in pension money and that the situation is really ugly.
Commentary to the formal results announcement states: “The impact of the restrictions on economic activity was widespread, with output declining sharply in all key sectors.
“This led to significant impacts on our clients, some of whom have reduced salaries temporarily, some reduced contribution rates to retirement savings temporarily and in other cases retrenched their employees, which reflect in the unemployment statistics, the lingering effects of which will likely be felt in our business in the next 12 to 24 months.”
The commentary continues: “In this challenging operating environment, our client base has experienced retrenchments, low levels of employment, negative growth in payroll as well as an acceleration of business closures towards the latter part of the period.
“These factors have resulted in a reduction to our active member base with the impact felt in the second half of the period. Retrenchments and business closures were experienced within our umbrella funds, which are primarily small, medium and micro enterprises (SMMEs). Our standalone client base, comprising larger corporates, while reporting low levels of retrenchments, were impacted by reductions and suspensions in their payroll as well as low levels of employment.”
De Villiers indicated that while most retrenchments to date were cases where smaller companies closed down, retrenchments at larger companies are showing signs of starting to increase.
It is still Covid-19 playing out, exacerbated by SA’s weak economic foundation.
“This year has been an unprecedented year globally, with the outbreak of the coronavirus pandemic that has intensified the already challenging trading conditions in which Alexander Forbes has operated in the six months ended September 2020. The hard lockdown in South Africa during April and May resulted in very limited business and economic activities apart from designated essential services,” says management, noting that GDP contracted at an annualised rate of 51% in the second quarter of the year, marking the deepest quarterly contraction in history. It has extended the economic recession to a fourth quarter.
At the same time, global and local markets experienced significant volatility with the worst market crash in decades, while SA saw its sovereign credit ratings falling further.
Management maintains that Alexander Forbes performed well under these difficult circumstances, if one looks past the bad performance of the insurance businesses that the group wants to sell and has thus classified as discontinued operations.
Continued operations delivered an increase of 6% in headline earnings per share to 18.8c in the six months, but provisions at the insurance businesses that Alexander Forbes is still to exit resulted in a 41% decline in the overall headline earnings per share (EPS) number. Headline EPS dropped from 24.5 cents a year ago to 14.5 cents.
The insurance operations of the group (short-term insurance and group risk) and smaller African operations were classified as discontinued operations during the previous financial year, but this far only the Alexander Forbes Insurance Company Namibia (AFI Namibia) has been sold.
Management indicates that these businesses will hopefully be exited by the end of the financial year, but shareholders will need to contend with them and the brake on earnings for the foreseeable future, as well as continued tough economic conditions.
Thus, the current share price is 30% lower than its 12-month high and the latest results still put the share on a fairly hefty price-earnings ratio of 15.4 times.