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New reporting policy sets Liberty shareholders free
In the company's 40th year, Donald Gordon's life insurance giant approaches a new relationship with Stanbic, writes JULIE WALKER
CE Roy Andersen admits to bragging in outlining achievements for the financial year to December 1997: market share up from 12% to 14.25%, R1.7-billion worth of new business written in the Millennium product, a one-third rise in new business to R6.2-billion, total assets topping R101-billion and Liberty achieving enviable cost reductions whereby the expenses to income ratio is only 6.6%. International earnings grew 30% a share, Liberty entered its first black empowerment deal whereby Kagiso Asset Management was seeded with R500-million in investments to manage, key staff have been incentivised and the group's cumbersome structure of seven listed vehicles is being tidied. In its 40th year, Liberty's R42-billion market capitalisation makes it number three on the JSE. Chairman Donald Gordon says the share is ripe for a rerating. Andersen says a new basis of calculating shareholder earnings has been adopted as it conforms with UK standards, SA's Generally Accepted Accounting Standards, and makes absolute sense. Previously, shareholders' surpluses went to the reserves; now shareholders will see the total return. It also reconciles the conflict between investing in low-yielding equities and higher-yielding gilts. "Gilt income would report directly to shareholders, but equity investments give a far lower income and hitherto their capital appreciation has not had an impact on the income statement," says Andersen. Now it does - to the tune of a 62% increase in attributable earnings to R3billion or R12.15 a share. On an apples with apples basis, this is 20% higher than in 1996, and on a new apples versus an old pear basis (1996 earnings a share before shareholders' surpluses) the result is a near-doubling of earnings. Andersen says 1997's 33% rise in dividend to 425c includes a special 40th anniversary bonus. While the new basis of reporting will lead to greater volatility in earnings reporting, the dividend will be smoothed out of the substantial reserves. Andersen ducks questions on this week's cautionary notices from Liberty and Standard Bank, but hopes negotiations for a potential merger will be finished by the end of April. "We have a 20-year relationship with Standard Bank, we understand each other and have similar cultures. I think we have paid our school fees on how banks and assurance relate." Andersen says first prize would be to tidy the Liberty structure at the same time as any deal with Standard. With or without it, Andersen says Liberty will focus on product innovation, investment performance, wider distribution channels and better use of technology, all leading to better customer service. "Our investment performance is lower than we would want, being somewhere in the middle." The retirement of Roy "unashamedly conservative" MacAlpine could lead to a less cautious investment strategy. Internationally, Liberty's businesses starred. Capital Shopping Centres owns five of the top 10 shopping centres in the UK, where a strong economy and consumer confidence, and low long-term interest rates have made for good returns. The properties appreciated by £355-million or 16% last year. Liberty International's financial services also thrived. The group has £480-million in the bank and could readily borrow another £800-million. Jim Sutcliffe, former head of the Prudential in the UK, has been appointed to seek the right offshore acquisition for the group. Gordon's desire is to see it among the FTSE 100. Against a backdrop of global financial-market uncertainty, Gordon's 1997 chairman's statement calls for a rerating of gold, the only element to have been the ultimate store of wealth over time. "Perhaps the time is not too far away when investors and the world at large will again recognise the unique and enduring qualities of gold … now being sold down indiscriminately by the world's gold arbitrageurs, who are synthetically increasing the availability of gold brought about by a short-sighted policy followed by some central bankers and other gold hoarders who are either selling or lending gold for a small fee to speculators. "They use this availability to systematically drive down the gold price and reap short-term trading profits and, in doing so, devalue the balance of the gold stock of the lenders and downgrade the value of gold indiscriminately." Gordon says this is irresponsible, and questions the "stupidity" of people with vast gold stocks who write down the value of their own investments for 3%. "I expect a massive turnaround in the gold market. I'd like to see it revalued by 100 times." Gordon says the ills plaguing gold are mirrored in the stock market, where scrip lending is leading to depressed share prices of all the big market-capitalisation stocks, Liberty included. "Directors and trustees of portfolios who allow stock lending are in breach of their fiduciary duties and should be prohibited from lending stock." Gordon adds that SA's nominee system cannot be allowed in a mature financial market and should be scrapped. He is also lobbying for a company's right to buy its own stock, as in other countries. Capital adequacy requirements have to be adhered to so there is less risk that creditors can be cheated by allowing this. Gordon says five US companies that bought their own stock during the October 1997 crash turned the sentiment of the whole of Wall Street. Liberty would undoubtedly buy its own stock if it were legal. Gordon is dissatisfied with the poor rating - a price:earnings ratio of 13 (new earnings basis) or about 21 on the old basis pales against multiples of 60 or 70 of lesser companies.
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