Emerging Market wars: Sanlam vs Old Mutual

Old Mutual. Image courtesy www.oldmutual.com

Sanlam, like its competitor Old Mutual before it, delivered good interim results based on solid growth in the home markets and expansive growth in emerging markets.

Over the last ten years Sanlam has been the better performing company. It has avoided the obvious blunders that Old Mutual made over the same period and has delivered better returns to shareholders. Many investors believe that it remains the better investment.

However, SBG Securities has a different view on the future and favours Old Mutual as the buy in the sector. “Sanlam’s share price is demanding and one is effectively paying around 40% more in terms of earnings multiples or embedded value for the Sanlam shares than in Old Mutual’s case,” says research analyst Risto Ketola. “We also see that the excess capital story has largely played out in Sanlam whereas in Old Mutual it may just be starting.”

Sanlam said normalised headline earnings rose by 36% to R3.44bn in the six months through to June. Normalised diluted HEPS rose 35% to 169.1c and new business written jumped by 37% to R83bn, though the margin fell slightly to 2.83% from 3.2% last year.

The core personal finance arm of the business grew profits by 31% to R1.4bn and Sanlam Investments delivered an improved performance with profits growing 11% to R523m.

However, Sanlam’s emerging markets business showed its potential, growing 113% to R391m.

In the period the company expanded its presence in India and Malaysia. In India it increased its exposure to the credit operations of Shriram, its strategic partner on the sub-continent, with the investment of R1.1bn in Shriram Transport Finance shares. This added to the R2.1bn invested in Shriram Capital in the latter half of 2012.

It also acquired a 49% stake in Pacific & Orient Insurance, a niche short-term insurance business in Malaysia. Of the SA insurers, Sanlam has the largest relative exposure to emerging markets, it says.

“The underlying results are solid,” says Steve Meintjes, head of research at Imara SP Reid. “Management is pleased with the annualised 14% return on group equity value. It’s a crucial metric and the number came in ahead of target.”

“Things are coming together for them in terms of new business. Glacier is performing; the local business (targeting the mass market) is growing and then there is good growth in the emerging markets.”

India is a fragmented market that has tripped up many a foreign adventurer, but Sanlam is having reasonable success there, he says. “They are targeting the low end of the market, and have done so in a low key and conservative fashion. So far the margins have been good.”

However, he cautions that Sanlam’s second half may not be quite as exuberant as the first half. “There are some once-off items that flattered the results in the first half and a higher comparative base in the second half of the year that will make it difficult to maintain this level of growth.”

The company also cautions that results in the second half will be affected by an operating environment that is expected to remain difficult with weak economic growth in the group’s core markets and investment market volatility.

In comparison Old Mutual increased its earnings per share by a more sedate 22% to 9.3 pence while operating profit grew 14% to £801m. The group return on equity was 13.7%.

Like Sanlam, the majority of profits are generated in South Africa but Old Mutual noted that the recovery in its US asset management business continued as clients poured in $10.6bn worth of new money.

Also, like Sanlam, its future growth is firmly focused on Africa, and her mass market in particular. The firm operates in 15 African countries and is gearing up for further expansion, specifically in Ghana, Nigeria and Kenya. So far it has spent only $70m out of a $550m war chest that it has set aside for acquisitions.

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