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Johannesburg - The turnaround strategy of financial and risk services group Alexander Forbes [JSE: AFH] is yielding positive results, according to its half-year results released on Monday.
In its interim results for the six months to end-September, the group’s retirements business unit reported strong growth, while its emerging markets business clearly faced some challenges.
The bottom line for the period was down from R416m reported in the previous year, to R324m. Operating profit was up 5% to R455m. Headline earnings per share decreased by 20% to 21.7 cents per share for the period. An interim dividend of 18c/share was declared, up 6% due to the group’s strong cash position which is at a surplus of R1.5m, according to CEO Andrew Darfoor.
While operating income was up 3% to R1.799bn, operating expenses growth was contained at 2% (R1.344bn). “We are well on track to deliver our R200m to R250m expense reduction target by the end of 2020,” said Darfoor.
He said the group’s turnaround strategy is “intensifying”. “We are back in the game but we still have much to do.”
“Looking ahead, although we have made progress, turnarounds are rarely linear and the improving results should be tempered by the realism that the business still has issues to address and is performing nowhere near its full potential,” he added.
During the period the group focused on new appointments in senior management and also employed a strategy to convert profits from operations into cash, which amounted to R470m. “Higher cash remittances allow for optimal capital allocation and dividend flexibility.
“This remains an area of focus in better targeting capital allocation towards improved enhancement of shareholder value,” Darfoor explained.
Business units
Among the group’s institutional clients, the retirement business unit reported operating income growth of 16%. This was driven by “strong new business growth” and growth of its existing client base. Expenses were up 14%, a result of spend on financial well-being and member education to its umbrella fund clients.
The investments business unit saw operating income increase by 2%. “This was supported by strong market returns from local and global equity markets,” the report read. This contributed to a “blended market return” across assets under management and administration of 5.6%.
Group risk operating income was up 31%. The AF Life group risk grew its gross written premium by 22% to R246m, and achieved an annualised premium income of R534m. However, claims were adversely impacted by higher disability claims, according to the report.
Short-term insurance grew 11% year-on-year.
The consulting business unit was impacted by “delayed decision-making” at trustee and corporate levels. Darfoor said that consultants remain key to the group’s strategy. “We firmly believe that our value proposition remains relevant and we see strong momentum in clients continuing to value our expertise as a trusted adviser in delivering favourable outcomes and experiences by securing their financial well-being.”
Overall, institutional clients delivered R916m of operating income, 5% higher than the previous period. Expense growth was contained at 5%. Operating profit increased by 4% to R239m.
The group’s retail clients division reported operating income of R690m, 5% higher than the previous period.
The majority of growth was attributed to the insurance business and the short-term insurance business. Operating profit was up 1% to R223m. Much of the expenses was driven by investment in digital and modernisation capabilities, which saw them increase 7%, according to the report.
The wealth and investments business unit saw operating income increase by 1% to R421m. The retail wealth and investment business directs expenditure to future technology capabilities, contributing to a 5% increase in expenses. “As a result, profit from operations has decreased by 3% when compared with the prior period.”
The retail insurance businesses reported operating income of R269m, up 11% from the previous period. Expenses increased by 10% from the previous year, but operating profit increased by 16% to R52m.
Emerging markets lag
The emerging markets business, consisting of institutional and retail operations in Africa, saw operating income come down 8% due to the challenging environment, according to the report.
Costs however were contained at 3%, due to improved expenses and operational efficiencies.
Performance in emerging markets is largely impacted by Namibia and Botswana in the SADC region.
Operating income in Namibia was up by 4%, driven by strong performance in the retail short-term insurance business.
Operating income in Botswana decreased by 23%, affecting overall performance of the emerging markets. “The decline in operating income is a result of the loss of a key client in Botswana, the government of Botswana, who insourced the Public Officers Pension Fund.”
Other operations include those in Nigeria, Uganda and Zambia. “The emerging markets business remains a key pillar of the group's strategy and is expected to contribute to the group's ambitions by pursuing both organic and inorganic growth opportunities,” the report read.
Customer focus
The group’s operations in South Africa and emerging markets remain sensitive to the political and macroeconomic environments, said Darfoor.
“That said, at the interim stage of the 2018 financial year, our performance continues to show progress towards delivering what we said we would do.”
Darfoor said the group will continue to focus on improving operational performance and customer experience. “We have delivered more... more customer-focused solutions, more consistency in delivering positive operating leverage, more trading margins, more operating profit which, alongside more efficient profit to cash conversion, has led to more dividends.”
The group will use big data to be “more disruptive” in terms of predictive analytics. “Putting the customer at the centre of our value proposition remains key.”
