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Conduit Capital share analysis

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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.

Valuing Conduit Capital

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:

About Conduit Capital

Conduit Capital's main businesses are the Constantia Insurance Group & a stake in Anthony Richards & Associates (a credit recovery call centre).

Constantia Insurance Group

Conduit owns 100% of the Constantia Insurance Group, which operates through 3 insurance licenses:

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).

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".

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 Direct

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."

Directors have a significant stake in the game

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 & disposals in FY2011

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

 

 

Dividends

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 :)

Share buybacks

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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