Sanlam, South Africa’s second-largest financial services group, is expected to report basically unchanged pro-forma headline earnings per share (HEPS) based on a long-term rate of return (LTRR) when the company announces its results for the year to the end of December 2003 on Thursday, as a year focused mostly on restructuring has seen improved performances across many of its operations largely offset by restructuring costs.
According to a consensus of eight analysts surveyed by I-Net Bridge, Sanlam’s pro-forma LTRR HEPS are forecast to rise marginally to 123,1 cents from 122,7 cents in 2002. The range of forecasts is from 100,9 cents to 127,9 cents per share. The analysts also expect Sanlam to declare a dividend of 40 cents per share, up from 37 cents a year earlier.
The company warned in December that it expected its overall headline earnings on a LTRR basis to be in line with those reported in 2002, due to the impact of a lower investment base and a reduction in the LTRR used (12% versus 13%).
South Africa’s life-insurance industry was plagued for much of 2003 by poorly performing equity markets (both locally and offshore) and disappointing new fund inflows, two factors that Sanlam has not been able to escape. In its December trading update, the group reported negative net life business flows to the end of October, with annual premium equivalent inflows down 21% on 2002 levels, and new single premium business about 40% lower.
While Sanlam Life has achieved substantial cost savings and improved distribution and product innovation in its life operations over the year, the savings are not expected to make an impact on the bottom line until 2004, while significant restructuring charges will undermine the 2003 performance.
Somewhat offsetting the weak life performance has been a substantial improvement in the investment performance of Sanlam’s asset management subsidiary, Sanlam Investment Management, attracting new business. Added to this are the stellar results of both the group’s short-term insurance subsidiary, Santam, which reported a 49% increase in pro-forma LTRR earnings per share to 692 cents, and banking subsidiary Absa.
These should contribute to a strong improvement in the group’s overall investment income for the year.
However, Gensec Bank, the group’s investment banking operation — which has also undergone substantial restructuring in the past year — will add further downward pressure on Sanlam’s results due to reduced deal flow and the one-off costs associated with the restructuring and “build down” of the bank. Costs of retaining key staff during the transition process have mounted.
Sanlam Financial Services, the international advisory and asset management business based in the United Kingdom, completed its restructuring during 2003, but with the associated costs offsetting most of its earnings contribution.
Achievements for the year have included the appointment of Johan van Zyl as the new CEO in March, ending uncertainty surrounding the leadership of the company, and the clarification and extension of its relationship with Absa.
Another highlight was the recent announcement of the group’s black economic empowerment strategy to sell a 10% stake in Sanlam to Ubuntu Botho, a broad-based black empowerment consortium led by mining entrepreneur Patrice Motsepe.
Sanlam’s share price suffered from the company’s restructuring woes in the first half of the year, bottoming at a 12-month low of R5,80 on May 2. Since then, however, it has experienced a robust recovery and re-rating among analysts, gaining 63% to touch a 12-month high of R9,48 on Tuesday.
It has strongly outperformed the FTSE-JSE Life Assurance Index (J084), which is up 28% over the same period.
The current price of R9,37 gives the counter a price-earnings ratio of R11,73 and a dividend yield of 3,95%. It is rated a “buy” by seven of the eight analysts surveyed. — I-Net Bridge