BROKERS’ NOTES: Buy Santam, avoid Remgro (for now)

Chantal Marx, head of investment research and content: FNB Wealth & Investments

Buy: Santam

Last week, Santam released a trading update and trading statement for the year ended December 31 2023. Guidance on the bottom line was solid, with stronger investment income offsetting a weaker underwriting result. The underwriting margin pressure was well communicated and mainly a function of an unfavourable claims experience. Gross written premium growth was solid, however, and in the event of a recovery in the underwriting margin (with deliberate management intervention already under way) we would expect a strong improvement in underlying profitability this year.

The stock is trading on a forward p:e of 11 times, close to one standard deviation below its five-year average. It trades at a substantial discount to its local peer OUT and at a smaller than usual premium to the international peer group. The technicals are also supportive — the price appears to be in a markup phase complemented by the appearance of an incomplete “cup and saucer pattern”. The share is trading above its 200-day simple moving averages and upside momentum is prevalent according the MACD. Finally, the recent steep upwards trajectory of the on-balance volume indicator indicates that money is flowing into the share.

We would be comfortable taking a long position at current levels. Our upside target is R337 (+13.7%) with a stop-loss recommended at R280.

Avoid: Remgro (for now)

We still like Remgro from a longer-term perspective. The company holds some excellent assets with strong long-term growth potential such as Heineken SA, Outsurance and Vumatel parent CIVH, complemented by steady exposures such as Mediclinic, FirstRand and long-term insurers Momentum Metropolitan and Discovery.

We do, however, see some near-term headwinds within the portfolio — particularly in the newly formed Heineken SA. The larger Heineken Group recently wrote down its stake in the business after an underperformance post-merger that led to market share losses in the local market. Mediclinic is also facing issues with a recent billing scandal dominating headlines, and a key growth vector for CIVH (being a tie-up with Vodacom’s fibre business) faces competition authority hurdles.

We expect a continued correction in the share price into results set to be released at the end of March. Thereafter we will consider entering a long-term position in the company at between R139 and R142 a share.