Sanlam Maroc (SLM) Earnings Call Transcript & Summary

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

Thanks very much. Good afternoon, ladies and gentlemen, and thank you for joining us on this conference call. I'm joined today on this call from Sanlam by Abigail Mukhuba, who is our CFO; Heinie Werth, the CEO for Sanlam Emerging Markets; Lotz Mahlangeni and Grant Davids. And then from Santam, we are delighted to have with us today Lizé Lambrechts, who's the CEO; and Hennie Nel, CFO. Earlier today, we announced our intention to increase Sanlam shareholding in SAHAM Assurance Maroc, the leading property and casualty insurer in Morocco, and a business which we have a very strong regard for within our portfolio for the long term. Through our SAN JV, we are acquiring an additional 22.8% of the issued shares of SAHAM Assurance Maroc from Mr. Said Alj from Sanam Holdings. Sanlam has a very strong partnership with Mr. Alj and Sanam, with whom we've been discussing for some time how we might expand our business and distribution in the region in the longer term through further partnerships while retaining Mr. Alj's skills and experience. To this end, the parties have agreed to sell us their stake in SAHAM Assurance Maroc, so that in the medium to long term, we can contemplate bringing in further complementary partners who can help to increase our distribution reach because we believe that this will further strengthen our position in North and West Africa. The SAN JV will, therefore, increase its shareholding in SAHAM Maroc to 84.5%, for a total consideration of MAD 1.2 billion, which is around about ZAR 2 billion, payable in cash on the effective date of the transaction. Sanlam will fund the transaction using debt facilities, which will initially consist of short-term bridging finance. We will determine the longer-term funding of the transaction in due course. Once this transaction is finalized and subject to a number of other factors, such as market conditions and the closing of potential transactions that Sanlam has already announced to the market. The transaction is subject to certain conditions, including approvals from the relevant regulatory authorities in both South Africa and Morocco. We expect the transaction to close immediately after these approvals. You will know that Santam is a co-investor alongside Sanlam in the SAN JV, and Santam is supportive of this transaction. As part of the transaction, Mr. Said Alj of Sanam Holdings will reinvest 50% of the total consideration of the transaction in order to acquire shares in the Sanlam Group on the open market over the next few months. And these shares will be held by them for a minimum period of 2 years. The management team, together with the Sanlam Board, are delighted by Mr. Alj's and Sanam's decision to reinvest in Sanlam. And we take pride in his vote of confidence regarding our plans to enhance the prospects of the SAHAM Assurance Maroc and the Sanlam Group. Additionally, Sanam Holdings is chaired and represented by Mr. Said Alj who will continue to provide Sanlam with strategic, economic and commercial advice on matters related to its activities in Morocco in the years to come. This ensures that Sanlam continues to benefit from Sanam's experience and the knowledge of the local Moroccan market. In summary, this transaction supports our strategy at Sanlam to optimize our Pan-African portfolio and to strengthen our position in core markets. We are transitioning and elevating our successful partnership with our Moroccan partner to the Sanlam Group level, while also creating the opportunity for further partnerships over time. We're acquiring Mr. Alj's stake at a value that we believe is attractive relative to its long-term value, noting that the listed price of SAHAM Assurance Maroc reflect minority and illiquidity discounts to the fundamental value of the business. I will now open the call for questions, and I'm likely to pass, [ at least ask ] to some of the management team.

[Operator Instructions] The first question comes from Michael Christelis from UBS.

Just a few questions, if I can. So is this an opportunistic transaction? I mean this has never been flagged to us before. You've often spoken about wanting to deploy capital in Egypt and Ethiopia, but never have you mentioned potentially investing more into Morocco. So I'm just trying to understand the -- I guess the events or the -- almost the rationale for the seller wanting to sell and the strategic rationale for deepening your investments here. That's the first question. The second question, is there any point to this business remaining listed once you own more than 80% of it? Surely, [ your risk costs ], et cetera, that can maybe be extracted by delisting the business. And then thirdly, as a sort of sort of question around earnings is when I look at the earnings of this business and try and translate them very badly from French to English, they've been obviously very volatile. What do you see as a normalized earnings level that you effectively think you're paying in terms of a price earnings multiple for this business? I mean it looks, over the last years, to be anywhere between 13 and 30x earnings. What should we think about, in your mind, as a normalized level of earnings you're paying for here?

Michael, thanks very much for your questions. And you've -- we took a bet that you'd have the first question, and then it would consist of 3 questions. So we've made a lot of [ penny ] on you today. So in answer to your first question, I think we did explain the strategic rationale of this. We've said all along that we would favor investing further in markets, in our core markets and strengthening our position. And that moving to new markets, whilst not out of the question in the longer term, are certainly not on our radar in the short term. I think you mentioned Egypt and Ethiopia. And I think I've personally been very clear that whilst I don't have any problem with those 2 markets, I don't envisage anything in the foreseeable future. I think we've been discussing, as I said, the opportunity to expand our distribution, and I think this does create that opportunity in the medium to longer term. On your second question about removing minorities. I think technically, you're correct. And it's not impossible in the longer term, but I think you can understand that in a market such as Morocco, the delisting of a stock like that brings with it lots of implications. But certainly, it's something that we would consider where to be viable. And then your third question about normalized earnings. We think that if you -- this, obviously, last year was a very strange year. And in our minds, a normalized P/E multiple that this transaction implies is a multiple of 12.9. Heinie, I don't know if you want to add any points to this.

Yes, Paul. Nothing really to add, Michael, but just to add to what Paul said, I think you will understand that on the Moroccan regulator preferred for the share to be listed. And even currently, even before Sanlam are doing this transaction, they do not count the shares of Sanam group as part of the free-floating stock in Morocco. So from a Moroccan stock exchange, they anyway look at the stock as having 15% free float.

[Operator Instructions] The next question comes from Larissa Van Deventer from Barclays.

I also have 3, actually. The first one, you mentioned in the press release that Sanlam currently provides strategic economic and commercial advice. Could you please give us more insight into the kind of advice that they provide currently and how you see that evolving over time? Pretty obvious question, but why increase the stake if you already control it, because you already have 62%? And then the last one, is there a particular reason why you're using debt financing and not financing out of excess capital?

Okay. Thanks, Larissa. Sorry, I was smiling so much about something you said that I might have missed some of your questions, but we're not only gentlemen on the call. Thank you for the question with any gentleman on this call, but we've got Abigail and Lizé with us as well. So I've now got myself confused. The first question was why would we step up another when we already control the stock? I think it's because we view this as a really good investment on these terms. And we believe that it's accretive to both earnings and to our group equity value. And it also creates the opportunity for us, very importantly, going forward to, at some point, sell some of our stake while still retaining control to other potential distribution partners. So that's why we would do it. It's attractive financially, and it's attractive because of the optionality that it gives us strategically. Your next question was why debt and not excess capital? Well, it's entirely possible that down the line, we could use discretionary capital. Our discretionary capital right now would not be sufficient to fund this. But I take the point that you can also run negative discretionary capital. So that's a slightly sort of technical point. But for us, as you probably know, we have very low level of leverage. And actually, again, financially right now, it's very attractive for us just to use short-term debt financing, and we will put in place a set of arrangements in due course. You are aware that we've announced the, hopefully, sale of our Nucleus business in the U.K. So that's just one example of things that we flagged to the market. But it was -- oh, sorry, you asked what kind of strategic advice Mr. Alj and Sanam group provided to us. You would say they are very intimately involved in the Moroccan economy, not specifically in the insurance sector. But I think you'll appreciate this is a market that is far away from us different. And so for us, actually having ongoing advice, both about local economic matters, potential distribution partners, relationships with brokers is all critically important. And we don't envisage that changing post this transaction. Heinie, is there anything you can -- color you could add to that at all?

No. Nothing to add, Paul. I think some those are very well. We -- let's say, we value people on the ground that can continue to help us with advice in addition to management.

The next question is a follow-up question from Michael Christelis from UBS.

Apologies, I got cut off right at the end of the answer to my earlier question. So apologies if you already answered this. But just coming back to the rationale for your partner selling here. I mean was this a case of Sanlam wanting new distribution partners in Morocco and, therefore, you needed to effectively take them out in order to have the ability to negotiate with other partners? Or was it him coming to you saying he'd like to liquidate while still advising to you guys? I'm just trying to understand what the, I guess, the driver of this transaction was, whose side it was coming from. If you can maybe give me some color on that, I'd appreciate it. Apologies again.

Right. Michael, I'll ask Heinie to add some color. But basically, Mr. Alj is our partner, but also the Chairman of our Board. And so as a matter, of course, we have ongoing debates, discussions about how to grow and improve the business. Whilst Mr. Alj is a very well-known businessmen, we do think that having in the longer or medium term, potentially somebody with a banking franchise and distribution in that space would help us. So it's been an evolving discussion. And we think that strategically, it's the best outcome for the -- for this company in the long run. But Mr. Alj clearly does not want to lose any -- want to lose all of this exposure and has -- was therefore very keen to invest into the Sanlam Group, which, of course, means that he has some small indirect exposure still to this. But Heinie, is there anything you can add because maybe I didn't [indiscernible] with it.

No. Honestly, you answered it very well. I think at the end, it's just came to a natural conclusion this way. And I think the important thing, Michael, is the confidence that Mr. Alj is showing by reinvesting a substantial part of his proceeds in the Sanlam share in the sense that he -- and that he is very open about. He wants to maintain the relationship with Sanlam, and he want to continue to be supportive to the Sanlam Group because he believe in our African story.

Was the 2-year lock-in requirement of yourselves? Or is that something he offered [ as sign of ] interest?

Well, it's a part of the agreement. So it's like all conditions -- the way we think of transactions and agreements is it's a whole agreement. He can't say which part belongs to him or whose idea it was.

[Operator Instructions] The next question comes from [ Jase Sarif ] from Ninety One.

Paul, you mentioned that normalized multiple was 12.9x earnings. But on 2019 earnings, it's around 13x, which would suggest that you don't think you can substantially improve the earnings of the business. Is that correct? Because you have guided to certain margin improvements in the business over time. Or am I reading too much into that? So that's the first question. And then the second question is, is the reason for Santam delaying the decision dependent on what the capsule looks like? Because we don't know the extent of the COVID BI claims. That's the second question.

Okay. So it's nice to hear from you. Look, I'm obviously not clever like you and Grant and Abigail and Heinie. But when I said the multiple was on a normalized average of between 2015 and '19, that's just a factual statement. Certainly, we are very bullish about the business, which is obviously why we're stepping up our investment. And I'd be very surprised if Heinie doesn't deliver good earnings growth going forward. So unless I misunderstood your question, I certainly don't take any read from the price we paid into a poor outlook for growth in earnings. And on your second question, yes, it's just that actually, it's not necessary for anyone to make any decisions at this point because we are bridging the financing of this for the short term. And when we come to the end of that period, we'll decide how to fund it. So it could be equity from Santam and Sanlam. It could be more debt financing on either or both sides going forward or some combination. So the fact is it just hasn't arisen. And you shouldn't take any read through. As far as I'm concerned, Santam has an extremely strong capital position. The business is... [Technical Difficulty]

Ladies and gentlemen, if you could please remain on line. We have just lost our main speaker line. If you could please remain on line.

Yes, I'm very sorry about that. I don't think it was our fault, but anyway, I'm not sure if you heard the full answer. But if you didn't, I was checking with Lizé with our explanation, if she wanted to add anything. And I was just saying that Santam currently is in a very strong capital position and is trading very well. So there's -- that has nothing -- no bearing at all on this issue. But if you didn't get a full answer with us getting cut off, please just let us know.

Sure. And I've got one follow-up question. So I mean given that you want to keep having a local partner in the various entities that SAHAM Group owns and specifically related to Morocco. I mean could I say there's a very high probability that you will sell the stake or a stake to a local -- another local distribution partner at some point fairly shortly? Is that fair to say?

No. And I guess your definition of short and minor are different, I suspect. So we think that this is something that we would -- we're talking about long-term partnerships. So it's really important for us that we go back in this in a methodical way, and that we take time to find the right person. It's also possible that it could be somebody who serves [ as a strength of own ] rather than just Morocco. And so you shouldn't expect anything in the short term. We've been very clear. This is something you should think about a 2- to 4-year time horizon. It doesn't mean something couldn't happen shortly. But that would not be our intention. Committed to deal with this thing in the medium term in a sustainable way.

Paul, we have no further questions in the queue. Do you have any closing comments before we conclude?

No. I'd just like to thank you for being, as usual, a very good host. Thank you very much, and thank everybody on the call and as well as the management team and Lizé and Hennie. So thank you very much for taking the time and look after yourself.

Thank you very much, sir. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.

Thanks.