RMI: Is the down­side los­ing steam?

Finweek English Edition - - KILLER TRADE - BY MOXIMA GAMA

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.

POS­SI­BLE SCE­NARIO:

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.

AL­TER­NA­TIVE SCE­NARIO:

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