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Conduit Capital share analysis |
2012-09-04 After 3 days of trading I have finaly sold out all my Conduit Capital holdings (I did not have a lot to sell, but the share is #$%#@ illiquid). I purchased some shares in Conduit Capital at 85c/share on the 3rd May 2012 , after hearing Adrian Saville speaking about Canon's Superdogs portfolio being invested in Conduit Capital. I get a lot of ideas from other people, but I always carry out my own analysis (as should everybody), and I valued the company at between R1.10 and R1.30/share when I bought it - today I think it's worth pretty much the same. As the share was trading at my estimate of full value, I sold out all my holdings. What made me more comfortable with selling out is that (1) they own a large chunk of Amecor, and its share price fell from R2.30/share to R1.65/share, and (2) there are some more attractive opportunities I want to invest in.
I could be completely wrong, but looking in the rearview mirror I see Conduit Capital as being worth slightly less than R1.10 to R1.30 a share.
In carrying out the valuation, I guestimated the sustainable rate of owner earnings. I assumed the investment income earned in FY2011 was a better indicator of sustainable investment income going forward, than the investment income earned in the 6 months to 29 Feb 2012. I felt that the investment income was unduly elevated in the 6 months to 29 Feb 2012, and although Conduit did not give a breakdown I suspect that it was to do with fair value adjustments. The big increase came in the Corporate & Investment Services segment, from R17m over the whole 12 months to 31 Aug 2011 to R15m in just 6 months to 29 Feb 2012.
This rearview valuation should be adjusted by our knowledge of matters not factored into the valuation:
"A legal dispute relating to 2006 & 2007 inwards reinsurance arrangements concluded through one of the Group's external underwriting managers remains unresolved. Although there is the potential that a negative outcome may be material to Group earnings, steps have been taken to reduce any financial exposure & to mitigate such risk."
Interim measures leading to the implementation of the Solvency Assessment & Management framework in 2015 affect Constantia Insurance Company's capital requirements.
"Contingent rent is payable in connection with parking for which no rental agreement exists." (Conduit didn't put a monetary value to it, but it sounds like a minor issue?)
Has the Constantia Insurance Group hit the sweet spot in the underwriting cycle?
"The recent take-on of additional underwriting managers and profitable insurance portfolios should, over time, result in improved profitability and a meaningful reduction in the (cost) ratio to within our target range."
Amalgamated Electronic Corporation (own 26.5%), was R2.30/share on 29 Feb 2012, and has dropped to R1.65/share today
Conduit Capital's main businesses are the Constantia Insurance Group & a stake in Anthony Richards & Associates (a credit recovery call centre).
Conduit owns 100% of the Constantia Insurance Group, which operates through 3 insurance licenses:
Constantia Insurance Company
Deals mainly with underwriting managers, administrators &, in turn, brokers. Experienced positive underwriting results in all insurance classes, but delivery cost ratios remain above ideal levels. Net profit after tax showed an 84% increase over the previous comparable period.
Constantia Insurance Company mainly underwrites personal & small commercial business (not marine, aviation, engineering or heavy industrial insurance). It also uses its Alternative Risk Transfer capabilities (including Rent-a-Licence/Captive facility).
Constantia Life
Individual funeral & Personal Accident policies, sold under the name of Goodall & Bourne, a brand which is synonymous with funeral insurance in the Western Cape coloured community over the last 80 years." It has 43,000 lives on its books, and "although it is a small contributor to Constantia's bottom line, it came with a strategic property in Long Street." Premium collection agents live within the communities which they serve & have been representing the company for an average of 30 years. "The growth opportunity lies within the African community".
Constantia Life & Health Assurance Company
Similar products to Constantia Life, but caters mainly for Group Scheme business.
During 2008 and 2009 Constantia shed underperforming books of business. Growth has been organic & through the acquisition of intermediaries' established distribution channels.
|
Contribution to Profit |
UMAs where Conduit has a shareholding |
28% |
UMAs where Conduit has no shareholding |
72% |
In 2012 the Constantia Insurance Group went through a rebranding process to define a brand promise of "insurance made personal":
Conduit holds 40% of Anthony Richards & Associates (& exercises Board control), a credit recovery agency (they claim to be in the "top tier" in SA) which has been in existence for 10 years, manages in excess of R4.2m in debt, and produced a 21% improvement in after-tax profits. Clients include the big banks, clothing retailers & healthcare providers. All the call centre employees are black or coloured females, with an average age of 25 years. Their retention strategy "is one of investing in their ability to earn commission through good performance."
The Chairman is Reginald Berkowitz (since 2005), CEO is Jason Druian (since 2005) & financial director is Lourens Louw (since 2004).
The directors have a total beneficial interest of 62m shares, and rights through share options to another 4m shares (in total 26% of the shares of Conduit).
Acquisitions (R'm) |
Disposals (R'm) |
||
Property, plant & equipment |
3.5 (3.1 in 2010) |
Assets |
10.3 |
26.5% interest in Amalgamated Electronics |
24.5 |
Associate company |
1.5 |
Jointly controlled entities |
2.4 |
Trade debtors & loans written off |
6.0 |
Subsidiaries |
3.1 |
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Last dividend was 10c a share on the 12th December 2011 (Conduit pay annual dividends). If they declare another dividend of 10c at the end of 2012, that'll be a 12% dividend yield :)
On the 4th March 2011 a special resolution was passed to allow the company to acquire the company's own securities.
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