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UK Banking Conglomerate Completes First of Two-Step Separation, Potential Index Play

The Edge believes that it makes sense for big conglomerates to separate distinct businesses into focused strategic units, which then provides flexibility to pursue respective growth paths, multiple expansion opportunities and more effective management control. Completing the action initially announced on March 11, 2016, Old Mutual Ltd (OML, previously Old Mutual Plc) Spun off its UK wealth management business into the newly listed Quilter Plc (QLT LN, previously Old Mutual Wealth) today (June 25, 2018). Approximately six months from now, OML will be thinning its operative structure further with the divestment of its ~32% stake in Nedbank Group Ltd (NED) through a distribution to its shareholders, retaining the remaining 19.9% stake.

The Edge View (OML, Parent Ex-Spin)...
Now focused on emerging markets and becoming a South Africa-based company, OML will be led by Peter Moyo (CEO), who is known for his business acumen, financial expertise and strong client-building relationships. His tenure at Ernst & Young (1991-1997), OML (1997-05), Alexander Forbes (2005-07), Vodacom (2009-17) and OML (2017 to date) demonstrates his success stories. Starting his career as an auditor at E&Y in 1991, he became a partner within 3 years of joining the company and overhauled the company’s structure and direction. In 1997, he joined OML when it was on the brink of demutualisation, and successfully transformed the company to deliver real client solutions and building strong client relationships. As head of Alexander Forbes, he recovered the company from one of the biggest corporate scandals at that time, bringing it back to profitability in the process.

As Chairman of Vodacom, he repeated his excellence in building strong client relationships and initiating good corporate governance practices. His return to OML has seen the reporting structure revised to increase client efficiency and accountability. The compensation structure of OML has been aligned each of the important financial metrics and share performance to the management compensation, thereby ensuring company growth and value creation. There has been a total net purchase of 2.9m shares (worth £7.7m) by insiders over the last 3 months, which include the net purchase of 3m shares (worth £6.9m) by Alan Gillespie, who is a seasoned professional with ~28 years of industry experience. Lastly, as OML will no longer be primarily domiciled in UK, it cannot be part of any FTSE indices, thereby resulting in potential selling pressure from funds that track the FTSE. However, entry into the emerging market indices may provide a certain degree of rebalancing to the stock.

The Edge View (QLT, Spinoff)...
QLT is one of the leading UK wealth managers with the largest AUM of £114bn (as of December 31, 2017) among its peers and has a leading market position in some business segments. With respect to investor performance, 84% and 79% of QLT’s funds are above the peer median, whereas 50% and 45% of its funds are above the Index over the one-year and three-year periods, respectively. QLT has also been resilient to market volatility with a decline of -2.5% in AUM vs. the FTSE 100 Index loss of -8.2% during Q1FY18.

The company has registered strong top-line growth in the past (CAGR of 11% during FY15-17E), which is expected to continue driven by increases in net management fees. On the margin front, the pre-tax adjusted operating margin (AOP) has been under pressure (declining from 36.3% in FY15 to 28.7% in FY17), which the company expects to remain under pressure in the near- to mid-term due to standalone costs, investments in its distribution capabilities and increases in the variable incentives to the employees.