Position: LONG
Upside target: R15.40
Recommended stop-loss: R11.60

Recommendation: BUY

Peet Serfontein, Thabiso Mamathuba

Old Mutual is the largest life insurance company in SA and has a dominant market share in the mass foundation (lower end) and corporate segments of the market.

Old Mutual is a formidable player in the insurance space with a healthy capital position. The company is also well poised for a recovery in the market, with a strong recovery expected in the upcoming financial periods.

We reiterate our BUY recommendation. The original idea was published in April 2021. We extend our time exit to mid-August 2021 (the initial time exit was 8 June 2021).

Technically, the repetition in the price action remains of interest (see the bell-curved amber-colour shapes on the main chart). We expect the price to progress upwards from current levels to repeat the sequence.

However, the price action remains in a declining channel pattern (see the black parallel trendlines on the main chart). Lower highs and lower lows remain a concern.

The lower panel shows the bullish trend period in weeks. When the trend is in a bullish phase, the price tends to remain in such a scenario for longer.

According to the Coppock curve, upside price momentum on the daily time interval supports the bullish trend. The Coppock curve is a long-term price momentum indicator used to recognise major downturns and upturns in shares.

The recent sideways trajectory of the on-balance volume (OBV) indicator shows that money remains in the share. The OBV enables traders and investors to make predictions about future price movements based on trading volume.

Our entry range is between R11.60 and R13.50. Our target price is set at R15.40 (+18.2% upside potential from current levels). We adjusted the previous profit target slightly from R15.30 to R15.40.

Time to exit is mid-August 2021 (taking a medium-term stance). Keep the option open to extend the time exit should the price action unfold sideways, or our profit target be reached in a shorter time.

A price below R11.60 (-8.4% from current levels) remains a major concern, and is recommended as a stop-loss. A break below R11.60 could trigger R10.00 and R9.00 as the next targets.

Old Mutual seems attractively priced relative to its peers with a recovery in earnings expected over the medium term following the recent drag associated with COVID-19. We also regard the 12-month forward dividend yield of over 10% as very enticing.

Despite an increase in excess death claims due to the second wave of the pandemic, Old Mutual delivered a better-than-expected first-quarter operational result driven by stronger equity markets, good cost control, favourable sales mix, and good persistency.

While increased provisions and lower sales volumes had a negative impact on results, the solvency position remains solid.

The company is undergoing a cost optimisation programme with a savings target of R750 million by the end of 2022.

Although emerging market consumers, particularly in Africa, have come under pressure over the past few years, these markets remain underpenetrated, and Old Mutual is likely to benefit from having a first-mover advantage over time.

The largest downside risk to our investment case is a further material deterio-ration in the South African macro-economic environment, and regulatory pressure. Other risks include competitive pressure, possible margin declines, and market share losses.