PICK of the MONTH
Large life assurer Sanlam has been in eye-catching form with a share price gain of close to 30% over a year.
Clientèle, a smaller and more niche assurance play, less so. Clientèle’s share price is up about 10% over a year and well off the high of R14.50 in late July
not too long after the group issued a cautionary notice.
That cautionary simply stated Clientèle was considering a transaction. At the time, more than a few punters reckoned that could be a proposal to buy out minority shareholders and take the business private.
Later, when Clientèle indicated a takeover of another business was in the offing, the initial speculation was that the group was looking at buying out Assupol, a life assurer listed on the Cape Town Stock Exchange.
In actual fact, Clientele will acquire 1Life, a life assurer that caters to largely the same market. Ironically, Sanlam recently proposed the acquisition of Assupol.
LUKEWARM RESPONSE
The Clientèle tilt at 1Life received a lukewarm response from the market. Sentiment was also not helped by some horrible timing when FD Michael Cownie resigned a few days after the 1Life deal was announced.
The market, these days, seems less spooked by an FD leaving. Angela Pillay, a former executive at Sasfin and FirstRand, has since been appointed executive FD.
Perhaps of more immediate concern would be the trading update covering the six months to end December where the application of a new accounting standard knocked earnings markedly. The devil will be in the detail contained in the full interim report.
But the trading update stressed Clientele remained in “a sound solvency and liquidity position and has continued to generate strong positive cash flows”. Conversely, the impact of new accounting practices has lifted the group’s net asset value (NAV) to between R1.9bn and R2.4bn (compared with the R996m reflected at the end of 2022).
But looking longer term, it may now be a good time to reexamine the 1Life acquisition with the benefit of the recently released deal circular to hand.
1Life has been going nearly 20 years. A visit to the company’s website will quickly show the modus operandi —a quick, simple and easy way to apply for life or funeral cover. 1Life pitches to the mass and middle markets where affordability is a key consideration for potential clients.
1Life uses technology and data analytics to structure more personalised and innovative insurance offerings perhaps much the same way Capitec tapped into the vast unbanked market in South Africa.
Clientèle, for its part, also offers convenient and basic financial services products to the entry-level mass market. So, the deal merges operations with long experience in tapping the mass and middle markets.
It’s a sizeable possibly game-changing deal for Clientèle, with the enlarged entity boasting an embedded value of almost R8bn and with almost 1.5-million contracts.
The purchase price for 1Life is the company’s embedded value plus a control premium of 6.23%. This seems modest, but Sanlam paid a slight discount to embedded value when it acquired Assupol (which, admittedly, has struggled to get back to its pre-Covid form).
The bottom line is Clientèle is willing to stump up R1.9bn for 1Life a figure that should be contextualised by the group’s JSE market value of R3.8bn.
PREMIUM
But here’s the best bit: Clientèle will settle this sizeable acquisition by issuing scrip to 1Life’s vendor, Telesure Investment Holdings, at R16.25 a share. That is a significant premium on Clientèle’s current share price.
It is telling that Telesure is content to swap out its prize asset in exchange for shares in an enlarged entity. For one thing, that should put to rest any notions that the dividend-paying attributes of the enlarged Clientèle will in any way be compromised.
Big deals, as experienced punters will know, do look good on paper but dislocations in corporate cultures, strategic differences and ill-conceived senior management reshuffles at key segments can often destroy shareholder value.
BENEFIT OF THE DOUBT
IM is willing to give this particular deal the benefit of the doubt perhaps reassured by the fact that Clientèle would realise the 1Life business is on an encouraging trajectory.
Historic performance figures show that in the year to endJune 2021 a period disrupted and depressed by the pandemic
1Life generated net premium income of about R1.34bn and a loss of R207m.
In the financial year to endJune 2022, net premium income crept up 1% to R1.35bn but an improved underwriting performance of R730m meant 1Life posted a profit of R75m.
In the 2023 financial year, net premium skipped up 9% to R1.5bn, underwriting profits were up by a quarter to R912m and the profit more than doubled to R153m.
Overall, IM thinks Clientèle has pulled off a decent deal with 1Life. With the market still reserving judgment, it might be a good opportunity to snag a wellmanaged and now enlarged assurance hub on an earnings multiple of seven and a dividend yield of 10%.