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Companies
Tougher times ahead for AXA
Nicholas Way -May 2007
 With hindsight, it was one of the great corporate steals. In 1995, when National Mutual, one of our icons with 126 years of history to its name, was demutualised, the French group AXA SA snapped up 51% of the company for $1.1 billion; that stake is now worth about $6 billion.
Post 1995 the changes came slowly at the wealth management and insurer – the name, for example, only changed to AXA Asia Pacific Holdings in 1999. The French, it seemed, were happy to leave the company on auto pilot, leaving the board in Australian hands, including some who had presided over earlier disasters, such as its $100 million investment in John Elliott’s ill-fated Harlin Holdings and the disastrous war for market share with AMP in the 1980s.
But local shareholders weren’t happy. A merger with MLC failed to eventuate and it was slow to develop its funds management arm at the very time Australians’ disposable income was rising sharply. For years after listing in 1996 with a market capitalization of $2.5 billion the share price best resembled a crab – it kept moving sideways. It got to $4 in 1998 but quickly fell back after the MLC merger failed.
Today, those shareholders who held their nerve hold scrip in a far more viable company that has about $62 billion in funds under management in Australia, New Zealand and Asia. In the 12 months to December 31 2006 it notched a 25% profit increase after tax and before recurring items of $678 million. In the same period operating earnings jumped 24% to $454 million.
Shareholders were not forgotten, getting a final dividend of 11.25¢ (up 45% from 7.75¢ in 2006) to take their year’s payout to 18.75¢ for a yield of 2.5% based on a $7.50 share price.
Understandably, group chief executive Andrew Penn was ebullient about the result. “This result continues the strong pattern of growth that we have established in recent years. The 24 per cent growth in operating earnings reflects the underlying strength of our businesses.
“Notwithstanding our recent acquisitions we have a strong capital position enabling us to significantly increase our final dividend, undertake an on-market share buy-back of up to $250 million, and increase our long-term dividend payout policy from 50% to 60% of profits after tax.
“Operating earnings for the Australian and New Zealand businesses were up 20 per cent and we have achieved our overarching goal – to increase enterprise value by 65% – one year early. The value of new business was up 25% and we further improved our cost-to-income ratio.”
Since that result was announced AXA Asia Pacific finalized the purchase of the insurance services and financial solutions provider Winterthur Life Hong Kong. When combined with the AXA Asia Pacific’s other Hong Kong operations, including MLC HK, it now ranks in the top five players in this market.
Certainly the broking firm Bell Potter is positive about that acquisition, estimating it will add 2% to earnings per share in the 2008 financial year. That optimism noted, the broker predicts a lower profit this financial year to December 31 2007 at $631 million before earnings do a U-turn to hit a predicted $714 million in 2008.
The broker’s cool profit prognosis for 2007 reflects, in part, the market’s scepticism about AXA Asia Pacific’s capacity to keep its earnings growth ticking over. Although there is understandable optimism about the prospects of its Australian, New Zealand and Asian operations, question marks remain.
Take life insurance in Australia, for example. Industry analysts constantly cite figures showing Australians are under-insured, and that the market size should grow exponentially. The problem is Australians show little propensity to further insure; the notion that government should provide in the event of a natural calamity remains well embedded in the national psyche.
The Federal Government’s decision to allow employees to have one final $1 million fling with superannuation at a 15% tax rate before June 30 was expected to see large dollops of cash find their way into the coffers of AXA Asia Pacific. Although it notched a 10% gross inflow into superannuation in the first three months to March 31, investors could be forgiven for thinking the number might have been bigger.
More broadly, the introduction of choice of fund, which the AXA Asia Pacifics of the world lobbied long and hard for, was expected to prove a boon. In the event Australians have been loath to switch superannuation funds, in part due to the healthy double-digit returns they have enjoyed in recent years.
Those question marks overhanging AXA Asia Pacific are not reason enough to not to buy the stock. But they suggest the strong share market gains of the past three years are at an end. When coupled with a dividend yield of 2.5% it is unlikely any investor will come anywhere near to enjoying the French experience.
Whatever your views, you can discuss this article - or any of Nicholas's articles - on our message board Your 2 Cents.
Nicholas Way is a former senior journalist at Business Review Weekly (BRW), who writes investigative pieces on Australian listed companies.
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