When Sanlam listed on the Johannesburg Stock Exchange at the end of November, about 2,2- million policyholders became shareholders. Some of these sold their free shares immediately and are probably glad they did – Sanlam’s share performance has not been inspiring since, and getting cash near the listing price of R6 was not a bad move, at least on a short-term view.
Others may have locked their share certificates in a bottom drawer. If there is no pressing need for the cash now – remember the shares were free at what remains the largest listing in the history of South Africa – and having the shares tucked away for a rainy day is a sound long-term view.
But what about those shareholders who want to convert their shares to cash but are not desperate, so want to hold out for more value if possible? The worst thing they could do now is sell, even though Sanlam’s share price was making convincing forays above the R6 level late last week.
There are a few indications that Sanlam’s share price might be on the verge of a sustainable improvement. Selling now is probably a prime example of getting out of a share at the bottom, a good old South African tradition for individual investors. Shareholders taking advantage of the R6 price now will probably be kicking themselves soon.
Or kicking me if the market goes the wrong way, or the rand stages another of its dramatic collapses. That’s the risk.
At least I can claim to be in the same boat as those policyholders not sure what to do with their free shares, only one step worse. I have not yet filled in the application forms for my shares, which are being held in trust by Sanlam until I get my act together.
So why should the share price improve? The numbers in the recently published annual report don’t offer much encouragement, though they are of course historical (to the end of December last year) and earlier comparisons are against pro forma figures.
Still, the trend for the core life business is dismal. Individual premiums are down by more than R2-billion, total insurance premiums are not much better, and the key new individual recurring premiums lost R180- million over the year and showed negative growth of 8% over the past three years.
Sanlam Health has been a disaster, showing an operating loss of R242-million last year. But it has been subjected to extensive restructuring and is expected to break even or show a profit by the end of this year, maybe even by the time interim results are released.
Fortunately unit trusts and linked products are doing well, attracting funds of R8,3- billion. And Gensec is in good shape. However, the fundamental factor is a recently estimated net asset value per share of R7,50, and embedded value (which includes the future value of business already on the books) of R9,47 per share.
At Sanlam’s current price of about R6, that means a buyer is getting the value of the life business for nothing.
So why the weak price? It was always suspected that Sanlam would have a weak share register, with many of the 2,2-million new shareholders selling every time the price moved up, which in turn sends the price down. This was seen last week when the price moved up to R6,08 on Thursday, only to be knocked back to R6,01c by the close of the market on Friday.
Sanlam financial director Flip Rademeyer says the share overhang is even worse. He claims there is not much evidence that individual sellers make up a significant proportion of the volumes sold, which means it must be the local pension funds – which also received large allocations of free shares – who are selling every time the price moves up.
What’s going to break this vicious cycle? Here’s the good news. Rademeyer also says there has been increased buying interest from international investors in Sanlam’s shares over the past few weeks, and significantly they are buying while the share price is going up, not on weakness.
If this foreign interest continues (and it coincides with renewed interest in emerging markets from international fund managers) the price could break firmly through the R6 listing price barrier. If that happens, Sanlam could be reassessed on fundamentals, which suggest a price nearer its embedded value of R9,47.
If for no other reason, hang on to the shares until September, when a one-off interim dividend may be paid. The annual report says the board is considering this payment, after which dividends will be declared annually.
Holding on to the shares until next year could be rewarding – it’s not impossible that your money will double.