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Alexander Forbes 14 October 2022

Repurposed for growth

Premier positioning, now with clearer vision: Alexander Forbes Group Holdings Limited (Alexforbes) is the largest multi-manager in South Africa with over R430bn in Assets under Advice (AuA) and Assets under Management (AuM). It is also the leading retirement fund administrator and consultant in South Africa with more than 850,000 members, delivering insight and advice to individuals, employers and retirement funds. 

Pivoting towards individual members: Historically, Alexforbes’ strategic focus has been mainly on corporate clients for the provision of employee benefits, products and services. However, there is now clear recognition that there is a growing trend driving engagement towards underlying members, particularly those saving through defined contribution schemes. The group aims to connect with more members more regularly to put Alexforbes top of mind when financial advice is required, particularly at critical inflection points such as resignation, retrenchment and retirement.

Good underlying profit growth and effective capital management: Underlying continuing operations’ profitability has improved year-on-year for the past four years (even through Covid) and profits from the disposal of discontinued operations have provided shareholders with meaningful returns. The pace of cumulative returns through normal and special dividends as well as share buy-backs has accelerated sharply under the current management team.

Ambitious targets within reach: Management has been clear about the medium-term financial targets it has set for the group, aiming for a cost-to-income ratio of below 70% (FY22: 77.9%) and 14.5% ROE (FY22: 9.2%) within the next four years. Our forecasts imply that these ambitions are certainly achievable with discernible upside risk from one-off items which could result in higher overall dividend flows to shareholders. 

Rerating already underway, more expected: AFH’s trailing price-to-earnings and price-to-NAV ratios have rerated strongly over the past two years (PE from 9.3x to 12.7x and P/NAV from 0.90x to 1.41x). We think the rerating reflects the visibly improved earnings growth prospects and the consistent improvement in the group’s return on equity. The share has also performed well on an absolute and relative basis, but our valuation work indicates there is more available. Our future valuation range for the AFH share lies between 538 cents and 599 cents, an uplift of between 13% and 26% from the current share price of 466 cents.

Risks: Alexforbes is dependent on supportive equity and bond markets to deliver its growth objectives, particularly in its Investments segment; central banks around the world failing to tame inflation could lead to a prolonged bear market in both equities and bonds, globally and in South Africa.

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