Sanlam Limited (SLM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Sanlam Investor Update. [Operator Instructions] Please also note that this call is being recorded. I would now like to turn the conference over to the Group Chief Executive Officer, Mr. Paul Hanratty. Please go ahead, sir.

Thank you very much. Good afternoon, ladies and gentlemen, and thank you very much for making time to join us this afternoon. I've got Robert Roux, the Chief Executive of the Sanlam Investment Group, online with me. I've also got Wikus Olivier, who's the Chief Financial Officer at Sanlam; and we've got Patrick Hartnic from Investor Relations as well on the call. And between us, we're very happy to take your questions in due course. I'm not going to say a great deal to introduce the topic. And we sent out a SENS today, and we're very excited to be able to announce today the acquisition of 25% of our third-party asset management business by African Rainbow Capital. This creates the largest black-owned asset manager in South Africa. And we believe that this is just the first step in helping this business to become a really dominant and successful asset manager in South African, and, in time, the African landscape. So we think it's a great transaction for us. We think the business has been put in a great competitive position. It's a very diversified business, and we look forward to a great deal of success together with our partners at ARC. So I'm not going to say much more. I'll let you all ask questions, and the conference organizer will allow each of you to make -- to put your hands up and to let him know when you would like to ask a question. And I'll try and direct it to the most appropriate person on the call with me. Thanks very much.

[Operator Instructions] Our first question is from Mike Christelis of UBS.

Can you hear me?

Yes, sure.

All right. Paul, just two questions, if I can. Firstly, this deal was announced -- or at least the sort of basis for this transaction was already announced, I think, about 18 months ago, and they were sort of kept getting reiterations from your [indiscernible] that the deal was imminent. Can you maybe just elaborate a little bit as to what the cause of the delay was in getting this deal across the line, given that, presumably, you've got 2 willing partners here? I just don't understand why it's taken this long to get to the stage where you're at. There's also talk at the time of bringing in another asset manager into the deal. Maybe you can just elaborate what the delays were. And then the second question, coming back to the original deal that was announced about 18 months ago. There was a comment in there around other possible transactions with African Rainbow, including I think corporate or health care. Can you talk a little bit about what the status is of those? Are they -- are those off the table? Or should we expect another similar-sized deal or maybe just sort of what the future holds for that -- the rest of that announcement?

Michael, thanks a lot. Nice to chat to you. Long time no see. Mike, I started work on the 1st of July. So it's not really very easy for me to comment on what the time. But I think what is true is that there were some ideas to try to bring together a number of different asset managers. And you can imagine the complexity of trying to consummate a deal where you're trying to put in an empowerment and also bolt together a number of different asset managers. So I think what's happened is that we've, as you would know, been through a recent strategic review. We're very clear that in order to be successful in the South African market, we need to have strong empowerment credentials in certain market areas, and institutional asset management is one of the most important areas in which to have those credentials. And we decided that we should get on with this because it's a strong competitive area for us. And it doesn't mean that we cannot still bolt-on or add in other asset managers who may want to be part of a really large black-owned asset manager. But it's just complicated. And so we've simplified the thing, and we've pressed ahead. And it now allows us to get on with some of the organic developments in the business. There may or may not be opportunities to consolidate in due course in asset management. Your question about are we going to do things in the employee benefits or I think you said the health care space. I think the -- there's no question that in health care and in employee benefits, empowerment credentials are important, but we've got no specific plans at this point. And if we did have -- I'm sure we wouldn't be discussing with you on this call any of those plans.

The next question is from Johny Lambridis of Prudential.

Yes, just 2 questions from me as well. Just going through the BDO sort of fairness opinion, just trying to work out what base level of assets was used to sort of do the [indiscernible] of that sort of 30 April, 31 May or 30 June? Because I think you talk about sort of if assets moved by a certain amount, there might be a need to sort of restrike the price. I just want to work out what level of assets are we sort of looking at as the base value. And then the second question. I sort of see they're using sort of 17% risk discount rate, which sort of seems like a rate for maybe a Saham, not really a Sanlam investment. If you could maybe just comment on why such a high discount rate to value the profits of what has been a very sort of established business.

Okay. And Wikus, do you want to pick up those technical questions for us?

Okay. No problem. I'll answer them, Johny. On the first question of base asset value, it was based on end of April asset under management levels that went into the valuation models. The risk discount rate, as you know, risk-free rates also increased quite a bit during the volatility. So you start off a base risk-free rate of 10%, it's effectively risk-free plus 7%. And that's kind of very close to the risk discount rates that we also use -- have been using consistently for the valuation of this business in terms of our own methodology.

So we can expect a similar -- we're going to expect a sort of a similar sort of valuation technique to be used at 30 June for the valuation of the remaining -- or, I guess, at June around 100% of business?

Yes. So it'd be a 100% consistent, Johny. And maybe, Johny, sorry. It's nice to chat to you again as well. The -- we sort of put in a comment there, which maybe Wikus didn't address. So when we were doing this, clearly, every day, I suppose, we change -- we can all change our view on what the future holds for markets and economies. But we were keen to press ahead strategically to get this done, but understanding that we were operating now in a period of quite a high degree of volatility. And so that's why there was a somewhat, maybe you might think, unusual clause sort of assets move in either direction, what we regard as -- would then take us into an area where for either party the valuation would be uncomfortable, and we'd have to redo it. So that explains why we put that in.

Yes. I guess my line of question is similar to maybe Mike's. I was sort of -- yes, I'm sort of concerned, your timing, the buyer's timing, the purchase of this business at the bottom of a cycle. That's my concern. It doesn't sort of seem like a natural time to be selling an asset manager.

Well, of course, it will be wonderful if you're right, that it's the bottom.

[Operator Instructions] Our next question is from Warwick Bam of Avior Capital Markets.

Paul, I just want to confirm that you can hear me.

Yes. We can, Warren.

Just following on from Michael and the other questions being asked. Just with regards to the actual discount that's being paid. In the 2018 circular, there was a minority discount, which had a typical range of 10% to 12% and then the marketability or liquidity discount, which was also around 13% to 15%. So can you give us a sense of what that looks like? And based it on the group equity value, the latest group equity value that you're able to disclose, I mean, if that's 31 December, that's great. What is the discount getting paid to that? That's question number one. And then in terms of the intergroup administrative services that will still take place, have these contracts been reviewed by the Board? And are they all now at arm's length? Or will that still -- will that process still take place?

Thanks, Warren. Wikus, do you want to pick those up?

Thanks. On the discount, Warren, from a percentage perspective, the combined minority and liquidity discount is 25% that's been used in the deal. From an intergroup fee perspective, those have been set at appropriate levels. And what of course the Board and the [indiscernible] committee made sure is that the valuation actually takes into account the actual fees that's been charged, which effectively means that it doesn't really matter what the level of the fees is as long as the valuation is also based on that fee basis

[Operator Instructions] Sir, it would appear we have no further questions in the queue. My apologies, we do have some questions that came through. The next question then is from Sarine Barnard of Ninety One.

Can you tell us what the current funds under management of the business is? And maybe just talk a bit -- so it's maybe a question for Robert. Maybe talk a bit about the composition. I assume Satrix will be quite a big part of that multi-manager. Just a little bit more color on the -- on that would be very helpful.

Yes. For sure, Sarine. So I'll ask Robert to give you both. Of course, he won't give you, I'm sure, the up-to-date AUM number because I think that he wouldn't be allowed to do so because -- just make sure Robert doesn't stray yet. I'm very happy for Robert to give you a rough idea of the breakdown. As I just pointed out in my opening remarks, Sarine, this is a very diversified business, and you're quite right. Satrix is a big and growing part of that. But Robert, give it a go.

Sarine, around about -- if you go back to December, the total assets that we manage in this business that excludes any assets that we manage for the Sanlam balance sheet is around about ZAR 450 billion. Of that, something to about -- I think I'm not 100% sure if 90 or 95, around about ZAR 90 billion at the end of the year. And if you can take a split of [Audio Gap] 5% institutional, about 45% overall. It includes the multi-manager. It includes, obviously, some and then alternatives as well. Alternatives is a relatively small of these, though. It's between 35 and 50. I don't know. Is that enough for you for -- at this stage?

Sorry -- yes. You said about 45% institutional?

That's right, 45% institutional, 55% retail. Because I exclude Sanlam, obviously. That's sort of not -- so you don't double count.

The next question is from Asanda Notshe of Mazi Asset Management.

Just checking if you can hear me.

Yes, we can hear you well.

Great. Maybe linked to the previous question. Just to -- maybe if you can remind us, regarding the exclusion of the sort of the balance sheet assets and so on. Why that was -- and why this sort of doesn't go as a package deal. And then second question is just in terms of the sort of management going forward of the new -- of this entity now that's being introduced. Is -- are there any changes that are anticipated? Or is it sort of the management team that's currently in play there?

Yes. Asanda, maybe I can help you. So I think that the way that Sanlam is structured as asset management is very clever. There's a separate business that looks after the assets of the life company. And by having some effectively managing third-party assets, we've had our management team very focused on managing assets that are not captive. So they had to be market competitive, both in terms of performance, product and sort of client service. And the Sanlam assets that are managed in a separate entity, I don't think would be appropriate to put into this transaction. Firstly, they're somewhat unique in their nature. There's a very high level of guarantees in them, and there's some very technical structuring. And you would just have a rather strange asset management business. It wouldn't look like a Mazi Capital or any other asset managers. So we've kept this to a pure asset management business, traditional asset management business, where it also benefits from -- fully from empowerment credentials.

Gee. Paul. I wish we'd look like that.

I'm sure you were wondering.

I mean just in terms of the management of the business.

Sorry, of course. Look, Robert can answer that, but there's absolutely no intention to change the management unless Robert's hiding something from me.

No. You've answered it. That's fine, Paul. You're correct.

The next question is from Francois Du Toit of Renaissance Capital.

Sorry, I got on to the call a bit late. Just quickly, I've seen the fairness opinion that you've guided for -- or at least the underlying assumption in the valuation is for 8.2% revenue growth long term. Then you maybe give an indication of whether there's any scale gains assumed and that impacts your distributable income growth in that some -- in that valuation, firstly? And then secondly, also, can you give an indication of what sort of net flows should get you to achieve that level of growth? And then thirdly, just on growth as well, what impact do you think that the improved BEE status will have on net flows, on your ability to compete and where that is most valuable?

Francois, thanks. Look, I'm going to let Wikus answer some of that. But I think that we're not going to answer that question in the detail to which you've asked it. I'll let Wikus answer it, but I'll preface it by saying that in doing the projections and in looking at the margins and the revenue growth, we have built what we believe are sensible business plans. We haven't let margin expansion go wild. And yes, we have allowed quite explicitly for what we believe the impact of the empowerment credentials will be, and we believe that there's a significant value accretion to us from doing that, that we look. But I'm going to say to Wikus -- I don't want him to delve into the kind of detail that you're looking for. But Wikus, if you're prepared to expand a little bit, you're welcome.

Paul, I think you've covered it well. As we said earlier on the methodology that we used is consistent with what we will be using, end of June. And being in a close period, I wouldn't want to expand more on underlying assumptions in detail.

We have a follow-up question from Johny Lambridis.

Sorry, just [ chime ] into Warwick's question around the discount for the deal. I mean if I recall correctly from the original sort of circular back end of 2018, although ARC will own a minority stake, I think the circular at that point said that they would be able to materially influence Sanlam investments and enjoy powers of control, including the ability to appoint directors and appoint and remove senior employees. So therefore, I sort of question the minority discount that they're getting, if they can actually effectively control the Board and remove employees. If you can just -- yes, maybe just comment on that. Do those powers of control still exist? And if so, why at further discount?

Yes. Look, I'll make a few comments. But Wikus, you might want to comment. We aren't actually doing things along the lines that you suggested. Wikus, do you want to just fill in the detail?

Yes. So I think from a Board perspective, as a 25% shareholder, you naturally expect them to add Board positions. So it's effectively based on their percentage shareholding. So they definitely will not be able to control the Board. Sanlam will have the majority Board members. And with regards to the appointment of senior management and -- again, there is a process of consulting with them. But then through the -- should there be a dispute through the mechanisms, the final decision will be lying with Sanlam on the key appointments.

So maybe just to wrap it up, Johny. I mean when we -- when I came in, certainly, I saw that there were some of those things and we were very clear that we see ARC as adding a tremendous amount of value to this thing. But it is still a Sanlam-controlled business, and we expect them to make a contribution to the Board, but certainly not to have powers of control.

[Operator Instructions]

It seems that we -- am I right in saying we don't have any further question?

We do have a question, sir. It's from [ Donata Sibanda ] of [indiscernible]. [Technical Difficulty]

It might be a technical problem.

It could be a network issue. Unfortunately, we cannot hear you, [ Donata ]. Otherwise, we have no further questions in the queue.

Great. Well, thank you very much to everybody who joined the call. We really appreciate the time that you set aside. And yes, we wish you a wonderful safe evening. And thanks very much to our coordinator on the conference call for your job. Thanks. Thanks very much.

Sir, we do have one last question that came in. Can you take that one?

Sure.

It's from Larissa Van Deventer of Barclays.

Just a very quick question, please. If I'm doing the math -- so in your announcement, you said that the earnings for IFRS purposes came to ZAR 352 million. Is that specifically for the bit that got carved out? So is an implied price NPE ratio of 9.3x correct then?

Yes. Wikus, you can comment on that. It sounds correct there.

Yes, it is correct.

So mathematically, because -- so okay. And then do I understand correctly that, that includes a 25% minority ownership discount?

That's after the discount that it's had.

Then we have no other questions, sir.

Fantastic. Well, everybody, have a wonderful evening, and I really appreciate your time. Yes, Robert, Wikus, Patrick, thanks a lot as well.

Thank you. Ladies and gentlemen, that concludes this event, and you may now disconnect.