Camissa points to Santam, Exxaro for high returns to shareholders
Asset management firm Camissa expects Santam, SAs largest
’continue short-term insurer, to delivering high returns to its shareholders after being further bolstered by the joint venture it has forged with Allianz, Europe’s largest insurer.
The tie-up pools most of the groups’ businesses on the continent to create a financial services partnership worth about R35bn and offers Sanlam access to the coveted Egyptian market, which serves a population of more than 100-million.
“Santam’s margins and return on capital have been excellent over the long term. Their robust long-term underwriting margin signature results primarily from outstanding risk selection and pricing,” said Edward Mtsweni, investment analyst at Camissa Asset Management.
“They have also effectively managed their capital requirements by diversifying their portfolio of risks and applying internal risk capital models that result in higher returns on equity than competitors,” Mtsweni said.
“As a market leader with a history of financial stability and solid risk management, Santam has immense scale, operates with efficiency and deploys leading underwriting skills that enable it to achieve high margins and provide a compelling competitive edge.
“This will serve shareholders well in the years to come,” Mtsweni said.
Santam has a market share of more than 20%. MiWay, which it acquired in full in 2012, has since captured a large portion of the move to direct insurance. The group has also grown its presence in the commercial insurance space, becoming one of the dominant players.
“Commercial lines insurance contributes approximately 30% of the industry’s premiums. Santam Commercial has exhibited above-industry growth and holds the largest market share,” Mtsweni said.
“This leading position stems from Santam’s deep experience and expertise in specialist risk insurance across a far broader range than competitors.”
Santam CEO Tavaziva Madzinga has flagged the rise in natural disasters as changing the industry and causing significant increases in reinsurance premiums, warning that the volatility in the reinsurance market is likely to become the “new normal”.
He said that to ensure sustained insurability, significant focus and financial resources by the government are required to turn things around, as well as a collaborative effort by the private and public sector.
Camissa also weighed in on the prospects of Exxaro, noting that SA’s biggest coal miner by production is a highly cashgenerative low-cost producer that also has quality iron ore assets and a growing renewable energy business.
“Exxaro has paid out around 70% of earnings to shareholders over the last four years, while still investing in its coal business showcasing a strong cash generating ability.
“Though decarbonisation will inevitably see a decline in coal demand, it will continue to be used, particularly in developing countries, during the energy transition,” said Camissa portfolio manager Mandi Dungwa.
“Environmentalist constraints on coal supply during this time should create a supportive environment for coal prices and, hence, cash flows for Exxaro’s export mines, especially given the low-cost nature of its mines. Stable cash flows will be generated from Eskom under long-term contracts,” she added.
The bulk of Exxaro’s cash flow is generated from its largest mine, Grootegeluk, that produces more than 28-million tonnes of coal a year. Almost 90% of that — 25-million tonnes
— are supplied to the Medupi and Matimba power stations. Grootegeluk has a considerable resource base that will enable it to supply Eskom’s power stations for the next 20 years.
Business Day reported on Monday that Exxaro said the “significant” role coal is still expected to play in the country’s energy mix as contained in the government’s draft Integrated Resources Plan (IRP 2023) is unlikely to lead to a change in strategy as it hunts for clean energy minerals.
Exxaro said while it needs more time to study the IRP 2023 and its implications for its business and the industry, its “position remains unchanged”.
“We have made the decision that we will not further invest in the acquisition or development of additional coal assets beyond our current portfolio. Our coal early value strategy remains sound; we have sufficient coal resources to meet our long-term coal supply obligations to Eskom,” Exxaro said.
In its 2022 annual report the miner said it was on the hunt for acquisitions in the renewable energy sector as it transforms into a diversified company thriving in a low-carbon economy.
Exxaro has a 20% investment in Sishen Iron Ore, a subsidiary of Kumba. Sishen’s ore commands a premium price because its high quality lowers carbon emissions in the steelmaking process compared with standard quality iron ore.
In 2019 Exxaro invested in Cennergi, a renewable energy business based in the Eastern Cape, to capitalise on the growing demand.
“Cennergi is a highly cashgenerative business with good returns, producing electricity at an operating profit margin of 80%, with very low ongoing capital requirements,” Camissa’s Dungwa said. “It comprises two wind farms collectively supplying over 700MW of electricity a year. Cennergi will be growing electricity production and Exxaro anticipates that it should be producing 3GW a year by 2030,” she added.
“Exxaro has also chosen to invest a portion of its coalderived cash flows in new mining operations, with a focus on producing commodities that will be used in green electrification applications; namely copper, manganese and bauxite.
“Their aim is for 50% of earnings (before interest, taxes, depreciation and amortisation) to flow from these new exposures by 2030.”
Dungwa said that introduces a considerable risk of valuedestructive capital allocation as Exxaro moves away from its core competence, coal mining, to unfamiliar jurisdictions, commodity exposures and mining operations or projects.
NATURAL DISASTERS [ARE] CHANGING THE INDUSTRY. THE VOLATILITY IN THE MARKET IS LIKELY TO BECOME THE NEW NORMAL
Tavaziva Madzinga Santam CEO