Alexander Forbes | Back to the drawing board

Alexander Forbes (AFH) has underperformed the market on a total return basis by 13% YTD (AFH-24%, JALSH: -11%). Despite reporting steady operational H1'19 results (core profit increased 9% YoY), the Board's strategic U-turn has diluted AFH's growth potential and undermined the Board's effectiveness. The Board has terminated a contract to modernise AFH's core insurance operating system and closed its retail life insurer. The existing Board approved both the IT Modernisation programme and AFH's Ambition 2022 strategy, which partly focused on retail product distribution to serve AFH's c.1.2m pension fund members. A publicly aired dispute between Mr A Darfoor (then CEO) and African Rainbow Capital (c.19% shareholder) resulted in Mr A Darfoor's dismissal on 25 Sep '18 and the appointment of Mr D de Villiers (previous Sanlam Corporate CEO) on 1 Oct ‘18. The approval of a B-BBEE deal between Sanlam (SLM) and African Rainbow Capital (ARC) creates a potential conflict of interest between AFH and SLM. AFH is a direct competitor to SLM in Corporate Employee Benefits and Investment Management. On the face of it,ARC's influence has skewed the AFH Board's balance of power, exposing AFH to perceived anti-competitive behaviour. We believe AFH is undervalued based on its existing institutional client base. However, we caution our recommendation based on elevated Governance risks.