Mark Ingham's insights into JSE listed results being released 6 to 12th September 2017 -

Included in this roundup:

• 06 September - Sanlam
• 07 September - African Rainbow Minerals
• 12 September - Ascendis Health

Sanlam - 06 September 2017     

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.

African Rainbow Minerals - 7 September 2017

Miner African Rainbow Minerals reports results for the twelve months ended June 2017 on Thursday, 7 September. Whilst we know what the quantum will be, approximately R3,2 billion or 1663 cents per share, the composition of that is more important than the number in isolation. This suggests growth of over 200% and earnings will be largely spread evenly between the first and second halves.

If investors are tempted to see a price earnings ratio of 6,5x, at a share price of 10930 cents, as an indicator of good value, don’t be. A PE ratio is largely irrelevant for a mining business subject to numerous variables that can significantly affect earnings.

Given the unsettling legislative issues facing mining I tend to recommend little or no exposure to South African mining stocks. BHP Billiton and Glencore, which are international miners, are recommended.

However, for those keen to take a punt my preferred pure play chrome exposure on the African Rainbow theme is Assore, which is the 50% JV partner in Assmang. Assore reported a strong annual result on 30 August on buoyant steel markets, including stainless steel which benefitted chrome. Chrome ore volumes grew by 12% and the price of chrome ore doubled in US dollars.

However, Assore at R273 has risen above my target price of R250, climbing from below R170 at the end of June. With there being no certainty that the prevailing demand and pricing will prevail for any length of time, investors need to be cautious now at these levels.    

Ascendis Health - 12 September 2017

Ascendis Health reports annual results for the twelve months ended 30 June 2017 on Tuesday, 12 September. This is a phenomenal growth stock and should be priced as such.

Adjusted earnings will be up by around 90% at approximately R630 million with adjusted EPS up by 27% to around 154 cents. This discrepancy is down to a capital raise in August 2016 - R1,2 billion was raised from a rights issue with a further R1,5 billion from a vendor placement.

The company listed in November 2013. The equity was listed at R11 per share, giving a market capitalisation of R2,5 billion, and my target price was R16. At that time, there were less than 230 million shares in issue whereas today there are almost 433 million, an 88% increase. Market capitalisation has risen to over R9 billion, a 3,6x increase in less than four years.

This growth has been fuelled organically and by astutely done acquisitions of cash generating businesses. I have no concern as to the sustainability of the operating platform and the stability of the financial position. This stock issuance and rapid growth needs some time to digest but the plus is that stock liquidity is being improved as majority shareholder C2C dilutes.

Recent share price weakness is an opportunity for fresh money at a reasonable forward multiple. The share price is now 2100 cents, having recovered from recent lows of close to 1800 cents. My fair value is maintained at 2570 cents with the target price 3324 cents.

Wishing you profitable investing, until next time.

Mark N Ingham     

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