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Diversification saves the day

Sanlam takes the good with the bad for an overall positive result.

Sanlam faced the toughest business year in its memory in 2018, its centenary year, but managed to deliver a credible set of results which will please most investors.

The two metrics that investors care about, dividends and adjusted return on group equity value, were both positive for the 12 months ended 31 December 2018. Sanlam increased its dividend, which is progressive, by 8% to 312c per share. Its return on group equity value (which is growth in equity over the period including dividend) of 19.4% per share was notable considering the market delivered a negative return.

“Operating conditions in South Africa remained challenging, with pedestrian economic growth, negative returns on the local equity market and currency volatility,” says CEO Ian Kirk. “The negative return of 9% for the JSE/FTSE All-Share Index compared to a positive return of 21% in 2017 had a pronounced impact on return on group equity value and earnings growth in 2018.”

Listen: Sanlam’s earnings fall 10%, global market volatility hits investment portfolio

The group grew earnings by 4% to R8.8 billion. However, after accounting for investment return (R707 million, down 57%), amortisation and project costs, normalised headline earnings reached R9.05 billion, a decline from the previous year of 8%. Headline earnings per share were 441c, down 8%.

Sanlam’s diversified operating model meant that while certain parts of the business, like Sanlam Investment Group and Personal Finance, were impacted by weak economic growth in South Africa, negative investment markets and volatile currencies, other businesses performed strongly.

Source: Sanlam investment presentation

In particular, the company saw satisfactory growth from Sanlam Emerging Markets and Sanlam Corporate, while Santam had a stellar year.

“In 2017 Santam had a disastrous year,” says Sanlam CFO Heinie Werth. “Yet last year it was a star performer. That’s how it goes and that is the beauty of our diversified portfolio. As long as the whole ship is going forward the good balances out the bad.”

Source: Sanlam investment presentation

“This is a solid result under the circumstances,” says Adrian Cloete, a portfolio manager with PSG Wealth. “The company has more or less delivered on market expectations and management guidance, which is always reassuring. Just how tough it is, is evident in both Liberty and Discovery’s results which were both impacted by poor investment returns.” 

Werth acknowledges that earnings of 4% are not exciting, but adds that the result is impacted by a number of other initiatives. “We are investing in a lot of new initiatives and these costs are factored into the results. In difficult times one can pull back or gear up for the future. In these times other people sell out, which provides us with an opportunity [to take market share],” he says. 

A highlight of the year included the acquisition of the remaining 53% stake in Saham Finances, the largest transaction concluded in the group’s 100-year history. “This is a R25 billion investment, which is equivalent to 15% of Sanlam’s market capitalisation,” says Cloete. “It is a fantastic opportunity as there is very little crossover in the two businesses and Sanlam will be able to extend its Life business into new markets. But it is important that the business delivers over time.” 

South Africa will remain the core of Sanlam’s business, and the company’s efforts to develop new markets in its heartland appears to be paying off. “We don’t have a profitable market share in the lower income market, and in this regard, our joint venture with Capitec has yielded over 500 policies in nine months,” says Werth. “This is a good start.” 

In addition, Sanlam’s efforts to capture market share in the middle-income segment through its stake in life insurance company BrightRock and SA insurtech startup Indie, which hopes to takes on traditional insurers in the youth market, are yielding results, says Werth.  

It is too early to pass judgement on the company’s new insurance initiative, African Rainbow Life, he adds.

But Africa, broadly, remains a focus as well. The company has been bulking up its presence in Africa, where rapid economic growth has increased the number of people with money to spend on insurance to protect their wealth. Sanlam is working on acquisitions worth over R2 billion in the rest of Africa and other emerging markets.

These incremental acquisitions, which are in various stages of completion, will be funded from a R3.3 billion war chest set aside for expansion this year.  

Looking forward, management warns that weak economic growth in South Africa in the short to medium term future may impact efforts to accelerate organic growth. The outlook for economic growth in other regions where the Group operates is more promising. 

Sanlam closed the day up R1.1o to R78.42. 

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We should also praise them for taking over Alexander Forbes in 2018. Very impressive. Did not even have to go through the competition commission. Very admirable. Please infiltrate Sygnia next guys.

I think that it should be 500,000 funeral policies through Capitec not 500.

What was not mentioned is that Sanlam achieved a level 1 B-BBEE status this year as well. Largest insurer to do so.

Look at their investment declines – These customers are voting with their feet. If you are invested with this appalling company – run as fast as you can. I had a pension fund with them for 30 years and right when the power of compound growth should be kicking in they delivered returns of close to 0% for five years – I got out however they charged me a small fortune to do so even though their “Wealthsmiths” were incapable of doing their jobs. With these once in lifetime long term investments you only really get one chance. The problem with Sanlam is that they are too big – 10 million customers and I would guess at 500 000 shareholders. Too many for either the customers or shareholders to hold them accountable.

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