Technological Disruption And Economic Headwinds Will Crush Performance

Key Takeaways

• Rising digital disruption, weak market demographics, and South African overexposure threaten Sanlam's traditional revenue streams, market share, and earnings stability.
  
• Expansion and regulatory challenges risk persistent costs, operational inefficiencies, and margin compression, undermining scale benefits and future profitability.
  
• Strategic integrations and expansion into emerging markets are enhancing efficiency, profitability, and risk diversification, positioning the company for sustained growth despite macroeconomic uncertainty.

Catalysts

Provides various financial solutions to individual, business, and institutional clients in South Africa, rest of Africa, Asia, and internationally.

• The accelerating pace of technological disruption and growth in digital-native competitors threatens to undermine Sanlam's traditional business model across Africa, as tech-driven insurtechs and fintechs reduce industry barriers to entry and erode customer loyalty, potentially resulting in lost market share and sustained pressure on both revenues and net margins over the long term.
  
• Demographic headwinds in key African markets, including persistently high youth unemployment and a limited savings culture, are likely to constrain demand for insurance, investment, and savings products-dampening organic revenue growth and slowing client asset accumulation well into the future.
  
• Ongoing overexposure to the structurally weak South African economy leaves Sanlam vulnerable to chronic macroeconomic stagnation, currency depreciation, and sovereign risk, directly pressuring premium revenues, reducing the value of investment income, and increasing the prospect of rising credit losses, all of which weigh on earnings growth.
  
• Execution risks related to complex pan-African and Asian expansion strategies-such as the integration of disparate acquisitions, navigating diverse regulatory frameworks, and achieving cost synergies-may result in persistent integration costs, operational inefficiencies, and weaker-than-expected profit margins, threatening the promised scale benefits and future earnings trajectory.
  
• The industry's intensifying regulatory scrutiny and higher capital requirements, combined with increased claims costs driven by climate change and extreme weather events, are expected to raise Sanlam's operational and capital costs, constrain dividend capacity, and compress net margins over time.

Sanlam Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Sanlam compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Sanlam's revenue will decrease by 50.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.3% today to 89.0% in 3 years time.
• The bearish analysts expect earnings to reach ZAR 22.6 billion (and earnings per share of ZAR 10.69) by about July 2028, up from ZAR 19.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.1x on those 2028 earnings, up from 9.6x today. This future PE is greater than the current PE for the ZA Insurance industry at 9.5x.
• Analysts expect the number of shares outstanding to grow by 0.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.45%, as per the Simply Wall St company report.

Sanlam Future Earnings Per Share Growth

Risks

• Robust execution of strategic initiatives, including the successful integration of Assupol and the SanlamAllianz joint venture, is driving operational efficiencies, unlocking permanent cost savings and productivity improvements, which is likely to enhance profit margins and support sustained earnings growth.
  
• The company continues to show strong performance momentum, with 15 percent growth in net results from financial services in the first quarter of 2025, robust new business flows in investment management, and excellent net client cash flow across business lines, all of which point to resilient top-line revenue and growing earnings despite an uncertain macro backdrop.
  
• Expanded exposure to high-growth regions through strategic investments-such as increased stakes in Indian wealth and asset management businesses and ongoing progress in the Pan-African partnership with Allianz-positions Sanlam to capture secular growth from the underpenetrated financial services market across emerging economies, which could significantly boost long-term revenue and diversify risk.
  
• Management is already realizing early signs of productivity and margin improvements in newly integrated acquisitions, and expects total margin improvement from further scale advantages and capital synergies once the business integration is complete, which over the medium term should drive operating leverage and higher net income.
  
• The group's consistently strong solvency and liquidity position, with a significant discretionary capital buffer and ability to navigate geopolitical and market volatility, provides it with the flexibility to seize future growth opportunities, withstand shocks, and maintain dividend capacity, supporting shareholder value and potential share price upside.

Valuation

• The assumed bearish price target for Sanlam is ZAR75.1, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Sanlam's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR116.0, and the most bearish reporting a price target of just ZAR75.1.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ZAR25.4 billion, earnings will come to ZAR22.6 billion, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 16.4%.
• Given the current share price of ZAR87.05, the bearish analyst price target of ZAR75.1 is 15.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.