RMI: Is the downside losing steam?
Rand Merchant Insurance Holdings ( RMI), which owns the insurance assets previously held by RMB Holdings, warns that the 2016 financial year will be a “challenging” one with low GDP growth, higher unemployment and pressure on disposable income.
The group, which reported a 6% increase in net profit for the year to end June, earns the bulk of its income from its stakes in Discovery (in which it holds 25%), OUTsurance (83%) and MMI Holdings (25%).
Insurance companies make money by collecting regular (usually monthly) premiums from clients, giving them a steady stream of cash f low. They invest the bulk of this money and earn returns on it. Their fortunes are therefore closely tied to the financial markets, the general state of the economy and events like natural disasters.
OUTsurance’s Australian business Youi, for example, was hurt in the past f inancial year by an increased c l a i ms r a t i o due to t he worst weather c ondit i ons e x per i enced by the country in the past decade.
Through its diversif ied portfolio of assets, RMI offers investors an interesting entry point into the local insurance sector, providing exposure to companies operating in life insurance, medical insurance, short-term insurance and asset management. It also provides exposure to traditional broker channels (used by MMI and Discovery), and t he di r ect c hannel employed by OUTsurance.
Its new asset management subsidiary, R MI I nvest ment Managers, is “successfully gaining traction” and is expected to make a contribution from the 2016 financial year, RMI said. Deals have already been struck with NorthStar, Perpetua, Tantalum and CoreShares, and in July announced it has hired the entire f ixed-income team from Cadiz Asset Management.
RMI has also launched a “nextgeneration business platform” called AlphaCode with the aim of identifying and enabling entrepreneurs or businesses with great ideas that could shake up the f inancial services industry. It made its f irst investment in September, buying 25.1% of Merchant Capital for an undisclosed sum. Merchant Capital, which was established in 2012, funds small- and medium-sized enterprises and uses innovative technology that allows clients to repay their loans based on the cyclical nature of their businesses.
With t his st r ateg y i n place, I believe RMI is positioning itself as an increasingly diversif ied player in the financial services sector, while offering exposure to a diversified portfolio of established i nsurance players such as Discovery. I expect a lot of upside direction in their OUTsurance division, which contributed R1.17bn in headline earnings, or 36% of overall headline earnings, in the year to end June.
RMI could be forming a falling wedge after correcting from the third phase of its primary bull trend. A recovery above R26.55 should see RMI regain upside to the R28.25 resistance level. A good entry point would be presented above that level, potentially triggering a gradual advance to the R54.30 targeted level in the longterm (one to f ive years). The megaoversold monthly relative strength index (RSI) is due for a bullish reversal.
RMI could fall further to the black dashed trendline, which would be breached below R21.85. If so, next support would be at R19.10.