Set for earnings lift-off
Good positioning, solid platform: The group’s FY23 results confirmed its sound underlying franchise. The membership base of the retirement consulting segment (+26% to >1.09m members) expanded as expected, due to organic and acquisitive growth. Healthcare members under advice grew 7% and total assets under advice and administration grew 4% in a difficult period for both markets and individuals, many of whom withdrew savings to cope with the rising cost of living.
Pick your reported earnings number: While the pace of corporate activity looks to be slowing, the group’s FY23 results were impacted by various factors including acquisitions, (EBS International, Sanlam’s stand-alone retirement fund business) the disposal of Alexander Forbes Individual Client Administration to Sanlam, and shifting required reporting requirements (IFRS16, reporting for leases). Consequently, the gap between the growth in various reported earnings measures such as headline earnings (+40% to R588m) and normalised profit from continuing operations (+5% to R494m) was confusingly large and time-consuming to reconcile.
Operational gearing set to kick in: In our view investors should look through the accounting noise to anticipated strong double-digit earnings growth across all earnings metrics in the next three years. Growth in revenue from evident higher membership numbers in retirement consulting is expected to positively impact both FY24e and FY25e. Group operational gearing opportunity is high due to lower expense growth in FY24e and, particularly, FY25e, helped by a smaller anticipated deficit in non-trading and capital items and higher investment income from higher average interest rates.
Lifting earnings and dividend forecasts: We expect the group to deliver FY24e profit before tax of R975m (+23%) thanks to all the factors mentioned above. PBT growth in FY25e from the revenue tailwind and sub-inflation growth in operating expenses (+4%, mainly due to lower lease charges) is expected to grow by 22% to R1.19bn). FY26e PBT is expected at R1.4bn (+18%). We now expect FY24e HEPS of 56.2c (+18%, previously 53.4c) and FY25e HEPS of 69.0c (+ 23%, previously 61.5c). Headline earnings in excess of R1bn and HEPS at 82.6c (+20%) are expected for FY26e. DPS of 49c and 60c are now expected for FY24e and FY25e respectively.
Better returns, higher valuation range: Our forecasts indicate that the management target of 14.5% normalised ROE will comfortably be achieved by FY25e (16.0%) although our forecast cost-to-income ratios of 74.2% in FY25e and 71.4% in FY26e are comfortably higher than the management medium-term target of below 70%. We believe that under this ROE scenario a price-to-NAV of 1.6x is warranted. The valuation is further supported by the appealing dividend yield of 9.1% for FY24e and 11.1% for FY25e. We believe the share price does not reflect the disbursement of any capital surplus to regulatory requirements or insurance recovery from ETV claims which together are conservatively estimated at 50cps. We raise our future value valuation range to between 618cps and 659cps (between 538cps and 599cps previously).