The cancellation of an IT project that management believes will not deliver the expected returns cost Alexander Forbes dearly in the first half of its financial year.
The financial services company announced operating income up 6% to R1.9 billion in the six months to end September. But profit from operations declined by 3% to R442 million. However, had the company not written off R52 million worth of operating expenses related to terminating the IT contract, operating profit would have increased by 9%.
“Under the circumstances we are pleased,” says Dawie de Villiers, the former Sanlam employee benefits CEO who was parachuted into the top job at Alexander Forbes following the surprise firing of Andrew Darfoor in late September. “The business has been resilient through a very tough economy. One must understand the effect that SA’s low GDP growth has on our business. Growth in GDP, employment levels and financial markets provide an impetus. Contraction makes it more difficult to grow.
“Add to that employment levels – we fight hard to service a client, but when job shedding takes place that has a negative effect on our bottom line.”
The growth in operating income was generated by strong performance across the business. In particular, Investments grew 16%, Consulting & Retirements grew 7%, and Emerging Markets grew by 10%.
“The underlying results are not bad,” says Adrian Cloete, a fund manager with PSG. “Investments (up 16%) and Employee Benefits (up 5%) are mature businesses and provide a good platform for businesses like Wealth and Investments and Retail Insurance which have plenty of room for growth.” He adds that the Emerging Markets business has also swung into a nice profit.
IT project: R287 million impairment
Losses from continuing operations of R45 million were impacted by the R287 million impairment of capitalised software development assets relating to the IT programme.
The group’s cash flows remain strong with cash generated from operations of R492 million up 5% against the comparable period last year. The group will have surplus cash of R1.2 billion after the annual dividend of R307 million is paid to shareholders.
The board has declared an interim dividend of 18 cents per share for the six months, unchanged from the comparable prior-year period. “The company is highly cash generative and defensive,” says Cloete. “Management hasn’t cut the dividend which tells me they are confident about the underlying cash flow. The dividend is healthy on a yield of 8.6% which underpins the share price.”
However, De Villiers warned investors that the second half of the year will be “challenging”, bringing additional challenges including the impact of client losses experienced in the period under review and ongoing competitive pressure.
Under no illusions
“We are under no illusions that it will be tough and we will have to up our game if we want to win,” he says.
He adds that Alexander Forbes is a people business and that clients are critical to the business’s success going forward. “We need to focus on individuals. We need to get the right people into the business and change the culture so that we can look after them well.”
He added that the business has undertaken a strategic review. “A lot of the business is performing well, but it is important to regroup and I plan to complete a proper review before year-end [March]. We need a simple strategy that everyone buys into and that the market understands.”
The new CEO has the prerogative to look at the business, says Cloete “Obviously he is looking at the strategy. He is a hardworking and skilled individual who is saying the right things.”
That said, the previous CEO also started off with a bang and said all the right things.
“Ultimately the way to convince the market of a company’s investment merit is to produce results that are above market expectations. If De Villiers delivers then the market will reward the company with a more appropriate market rating. That is how you judge a CEO,” says Cloete.