Insurance giant Sanlam reports results for the six months ended 30 June 2017 on Wednesday, 6 September. Insurance companies are complex and I’d caution about taking earnings in isolation as the best indicator of performance.
You should expect a quality result off a solid platform in difficult trading circumstances, not least South Africa. From an income yield point of view, Sanlam is both secure and attractive.
Earnings growth will be difficult to achieve. Whilst I have minus 2% growth in EPS for the full twelve months, down to 400 cents per share from 408,5 cents, that is conservative and could be better if investment returns keep up but this is impossible to forecast with any accuracy and is affected by factors largely beyond management control, including the exchange rate. For the January to April period, normalised headline earnings were up 9% on a relatively stronger investment market performance, supporting the investment return earned on the capital base.
Investors should recall that Sanlam only pays one dividend a year so there won’t be an interim dividend.
However, the dividend is likely to grow ahead of reported earnings for the three-year forecast horizon. Sanlam uses cash operating earnings as a guideline in setting the level of the normal dividend, subject to liquidity and solvency requirements. Dividend cover of cash operating earnings is managed within a 1,0 to 1,1 times range to target consistent real growth in the normal dividend.
A stronger rand average exchange rate will negatively impact on rand-based growth and returns in foreign territories, which include UK, India, Botswana, Malaysia, Nigeria, and various other African territories. Non-South Africa territories account for 30% of the value of new business. Sanlam has been diversifying across geography, segments, and product.
Investors should recall that Sanlam is a traditional insurer with life and general insurance three quarters of profits, a higher proportion than Discovery for example.
Santam, in which Sanlam has a 61,6% holding, has already reported and returned a lower underwriting result for the six months with good growth of 12% in gross written premiums. Santam’s solvency ratio is good and the economic capital coverage ratio of 151% is within the target of 130% to 170%.
Santam declared an 8% increase in the dividend to 336 cents per share, which is R370 million so Sanlam’s attributable share is R228 million.
Capital adequacy is good with life insurance having a 5,8x cover ratio, among the best in the industry.
Although not to the same degree as banks, the stock is sensitive to movements in bond yields and trends in interest rates and so the rising share price of late also mirrors what we have seen in bank share prices following the 0,25% drop in the repo rate.
The stock was too cheap in July at around 6500 cents and with the price currently 7100 cents it has moved closer to my target of 7200 cents. At this level, the stock still offers a relatively attractive forward dividend yield of 4%.
Foreign fund managers account for 40% of the stock, which is a vote of encouragement.
