Old Mutual (OML)

Previous Stock Tip These companies are all previous recommendations from the Red Hot Portfolio that I subsequently recommended and then sold from the portfolio at a later date. By no means are these companies intended to be buy recommendations for you to go out and invest money towards their shares. For the opportunity to start making serious money from the recommendations I am making now, just start your 1 month free trial! Initial Recommendation: RHPS Issue 95 / April 2009 The 2008/9 crash means you can buy this blue chip for mere pocket change! There’s an old stock market adage that goes something along the lines of: “When the blood is running in the streets, it’s time to buy.” This grisly saying has its roots in the great crash of 1929, when stockbrokers and former high flyers leapt off buildings after losing everything. The market’s certainly crashed hard in the past few months too. And it’s at times like these that shrewd investors should look for bargains. So how about looking at one of the oldest companies on the JSE? Strong roots + a sound track record = A clear cut winner! As children, we’re taught not to spread rumours – but apparently not everyone listens! Several weeks ago, someone at UK newspaper The Observer reported(without naming its source) that Old Mutual (OML) – England’s fourth largest insurer – would be selling its 53% stake in Nedbank. This speculative rumour brought the share price to its knees sending it crashing down 12%! This, on top of an already depressed share price! Now you have to ask yourself, why you would want to sell off an asset that’s worth R2 billion more than your own enterprise? You wouldn’t! And, as it turns out, Old Mutual’s actually going to increase its stake in Nedbank by 2%! So much for the rumours! But we shouldn’t complain, this 12% drop means you can pick this share up for less than the price of a litre of milk. A household name you can trust Old Mutual is just that, OLD! Did you know, the original company Mutual Life Assurance Society of the Cape of Good Hope was started in 1845? It was founded by a Scotsman named John Fairbairn with only the capital earned from the first 166 policyholders. Since then, it’s grown into a large multinational corporation with a respectable name you can trust. In fact, you’re probably very familiar with many parts of the group: Mutual and Federal and Nedbank Group. There’s also Skandia, Old Mutual US Life and Old Mutual Asset Management. These subsidiaries operate in Southern Africa, Scandinavia, the United States and the United Kingdom. Intense fear has pushed this share into penny share territory – but it won’t stay here for long There’s tremendous fear in the market right now, particularly towards financial shares and insurance companies. Remember, insurance companies are valued according to their assets. These are largely invested in the stock market so, when the market crashes, their value takes a hammering – regardless of the fact that their clients keep on paying their monthly premiums. This is why there’s often piles of money to be made in buying beaten down insurance shares! They generate huge annuity income. Plus, when the overall market recovers, so do they! The fear surrounding Old Mutual relates to its US Life business. As you know by now, the arch-capitalists in America are no smarter than the rest of us! Their biggest banks and insurance companies have collapsed, jobs have been lost and dividends slashed. This means Old Mutual, along with everyone else who operates in that environment, was severely punished. The main cause for concern floating around the mainstream media is that the group will have to issue more shares to keep it afloat. But, in results released a few weeks ago, CEO Julian Roberts categorically stated that the company can withstand a great depression scenario – without asking for more money. He assured the market that over 90% of US liabilities were now hedged against further falls and the Bermuda business is effectively closed. (This was causing considerable negative sentiment and is good news.) But to get this right, he had to cut the dividend for the year. This hasn’t made him popular! It’s 132% cheaper than it should be! Because of all this hearsay, Old Mutual’s currently selling for below three times its forecast earnings! That’s right, you have the opportunity to buy a blue chip share at a penny share valuation! Investec Asset Management's Chris Freund believes this share should be conservatively valued at somewhere between R13 and R14. While top banking analyst, Kokkie Kooyman, believes Old Mutual’s Nedbank stake alone is worth around 400c and its Mutual & Federal stake’s worth another 50c. At the current price of around 712c, this means you get exposure to the rest of the group for just 262c cents! This includes its Scandinavian operation (which is performing well), its UK business and a potentially huge recovery from its US group. (Current funds under management there are almost four times the size of Sanlam!) It doesn’t take a rocket scientist to figure out that if you get in now, you could make a killing when the market turns around! And don’t be too concerned about the company holding back on dividends this year. It’s just smart management in these uncertain times – rather be safe than sorry! No matter what happened overseas, this is a monster share in local terms and it’ll keep collecting premiums month after month!

RHPS Verdict It’s very rare to have the opportunity to get into this kind of quality blue chip company at such a bargain price! We now know it won’t be selling its shares in Nedbank and that, even though US Life sustained a huge financial blow, it didn’t cripple the entire group. I’m not worried about the lack of a dividend either. Even with the substantial loss in its US operation, Old Mutual has reserves of £700 million above regulatory requirements. According to Roberts, the group’s already sold its small Australian subsidiary and pulled out of Portugal. In doing so, it’s consolidating into a leaner, more concentrated operation. While existing shareholders will be bitter about the hard knock it’s received, we can buy in near the bottom and ride it all the way up again! I predict a long, profitable future for this very old company, which has somehow managed to survive all the market’s ups and downs since 1845! I vote this share a buy at current levels of 712c to a target of 1,000c in a year. Update 1: RHPS Issue 96 / May 2009 RHPS Recommendation: Hold Old Mutual: Catching its breath After running up to almost 900c, Old Mutual’s taking a breather. A report suggesting the group may have to postpone some sales has been released. This setback’s taken place because the sale isn’t likely to get a good price and the group’s not willing to dump them at a silly price. This may dampen enthusiasm for the shares in the short- term. Update 2: RHPS Issue 97 / June 2009 RHPS Recommendation: Hold Old Mutual: WOW! The market really liked Old Mutual’s trading update – it sent the share soaring. The share’s run up 29% since its inclusion in our portfolio two months ago. It’s now back to the level it was before the wheels came off last November. After this very strong recovery from the lows below R5, it may pause for some profit taking. But don’t fret, the trend’s certainly upwards with this one. Update 3: RHPS Issue 98 / July 2009 RHPS Recommendation: Hold Old Mutual: Staggering… Although it’s slowed down, Old Mutual continues to trend upwards. The easy money has een made! Update 4: RHPS Issue 99 / August 2009 RHPS Recommendation: Sell Old Mutual: What a run! Old Mutual’s had a very strong run, gaining 70.5% over the four months it’s been in our portfolio. Although it has a long way to recover (results are due next month), it’s time to take profit and put that money into a true penny share. Remember, this was an opportunistic buy caused by the market crisis.

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