SUMMARY
Position: LONG
Upside target: R72.50
Recommended stop-loss: R59.50

Recommendation: BUY

ANALYSTS:
Peet Serfontein, Thabiso Mamathuba

Sanlam is a leading financial services group based in Africa. The company has provided financial solutions to individual and institutional clients for close to a century.

The company is regarded as a core portfolio and is highly regarded from a quality perspective, with the company being well diversified from a geographic and product standpoint. The company boasts a strong balance sheet with adequate reserves.

Technically, the price movement remains in an incomplete descending pattern (see the black converging trendlines on the main chart as well as the insert), which makes the share attractive is an investing option. We expect price action to progress to notation “3” on the chart.

The descending triangle pattern is a bearish formation that develops during a downtrend. There are instances when descending triangles form as reversal patterns at the end of an uptrend, but they are typically continuation patterns.

The share remains above its 200-day simple moving average. Continued price action above the 200-day classifies the long-term trend as bullish.

TECHNICAL ANALYSIS
The lower panel shows the combined signals of the Moving Average Convergence Divergence (MACD). The MACD is a trend-following momentum indicator.

Combined signals occur when the MACD crosses above the share’s MACD signal line (regarded as a bullish crossover) as well as crossing above its zero or base line (regarded as a positive bias to the share). When the amber-coloured lines spike to 1, it is regarded as a quality technical signal.

According to the Relative Strength Index (RSI), the share seems to be overbought at ~R75.00 which leaves some upside potential from current levels. This makes our profit target of R72.50 realistic.

Entry range is between R59.50 and R63.50. Our upside target is set at R72.50 (+14.50% upside potential from current levels).

Time to exit is early June 2021 (taking a medium-term stance). Keep the option open to extend the time exit should the price action unfold sideways or reach our profit target in a shorter time.

A price action below R59.50 (-6.0% from current levels) remains a major concern for downside potential and is recommended as a stop-loss.

LONG-TERM FUNDAMENTAL VIEW
Sanlam’s longer-term growth prospects are improving, notably due to its operations in other emerging markets. Africa ex-SA provides growth opportunities with the potential for a stronger earnings contribution over time.

Sanlam’s recent partnership and JV with Capitec around funeral policy cover provides an additional domestic growth driver.

Operationally, the group’s performance in FY20 was particularly strong (excluding the impact of COVID-19), with growth in new business volumes being supportive.

Claims and persistency experience in the life business was steady despite higher mortality claims.

Despite uncertainties around COVID-19, the group remained well-capitalised with Solvency Capital Requirement (SCR) cover ratio of 191% in December 2020. This was towards the upper end of the target cover range of between 170% and 210%.

The company is targeting 2% to 4% real growth in dividends over a three-year rolling period.

The group trades at a premium to embedded value of 6.6% and we like the company’s history of robust earnings, efficient capital allocation, and market positioning.

Risks to our fundamental view include currency risk from operations outside of South Africa, which will intensify as earnings contributions from these countries grow.

The company is also exposed to equity market volatility.