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BOE fails to swallow its own medicine on unbundling
After a year of wheeling and dealing, the market has taken a less than ecstatic view of the group, writes JULIE WALKER
"WE are not frightened to unbundle the BOE control structure, we just think it's not wise," says BOE group chairman Bill Macadam in response to a question on why the pyramid should be maintained. Macadam was speaking from Cape Town in a presentation to the Investment Analysts Society also relayed to Johannesburg and Durban. The question was posed because BOE Corp, the pyramid company with 50.1% of BOE, trades at a discount of between 7% and 20%. Macadam agrees that he does not like the discount: "Most of management's money sits in BOE Corp." However, Macadam believes BOE can continue to deliver superior growth. Yet he so eloquently explains the dangers of false control structures that his stance on BOE's seems somewhat at odds with his philosophy, especially as the group will enfranchise the low-voting BOE Corp N shares next year. He acknowledges that BOE has had a year of wheeling and dealing, apologising for the confusion but concluding that the structure is "very simple now". The market took a dislike to all the changes, so much so that BOE itself is trading only at or about net asset value of 403c a share. "We do a little jig in Wale Street (head office) if it trades at a premium," admits Macadam. The feet were immobile on Friday; the share price shed 21c to 377c in spite of the group having announced earnings growth from 26c to 45c a share and an increase in dividend from 5c to 13c in the year to September 1998. Macadam says what was declared was probably a little below most analysts' forecasts but that there are "no Brownie points for pushing out more as earnings in the current climate". BOE now comprises four arms. BOE Bank houses NBS, Boland PKS, BOE Private Bank, BOE Merchant Bank and BOE Corporate, all working off a central treasury. The other arms are BOE (1838) Investments (including Nail, Century City Centre, Claremont Life, National Cereal, RMB Holdings Monex etc), BOE Asset Management, and International (Chiswell Associates UK). There are 2.9-billion shares in issue, R12-billion share capital reserves and R57-billion of total assets. Current market capitalisation is just over R10-billion. Total income rose tenfold to R3.47-billion, and headline earnings climbed from R160-million in the previous year to R485-million. Organic growth from asset management, the private bank, investments and half of BOE Investment Bank was 122% to make R291-million. The rest came from the acquisitions of NBS Boland and Orion, the balance of the investment bank and international. The outside shareholders in NBS Boland and Orion were bought out and entire income accrued for only the last two months of the reporting period. Macadam says that while an expenses ratio is not all that pertinent to the group as a whole, its expenses were 44% of total income; a typical SA bank would do well to get in at under 60%. The group employs 6 000. Macadam says the headline return on equity at 12% is palpably too low (it was 21% in 1994 and 15% last year). Acquisitions were part of the story, and significant new capital was raised by the group. "You can't raise money on day one and get a 20% return by day two unless you are really lucky." Total return on equity, including capital and other items excluded from the headline or recurring figure, was 22%. "The group is clearly overcapitalised, but this doesn't bother us at all in the current climate." BOE is willing to spend big amounts of capital on the right projects. Macadam says BOE is budgeting for good real growth in earnings a share - 25% compounded on average - but won't extend his neck for the immediate future: "Growth of 25% in the current year would be a magnificent effort by any bank." Looking further ahead, Macadam expects a geographical diversion of income of up to 40% over time, but he is adamant that BOE will proudly remain a South Africa company. "The loyalty of the client base will be the battleground for SA's financial services groups in the next three years. Ours is very loyal," he says.
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