Well-positioned conglomerate. Trustco Group Holdings (Trustco) operates primarily in Namibia, where it is one of the most profitable insurers, the largest private urban landowner and runs one of the most actively followed media sources. It also owns a promising mining asset in Sierra Leone. Trustco’s shares are listed on the Johannesburg and Namibian exchanges: market cap is US$673mn, ADV is US$15k. The key shareholder is founder and CEO, Dr Quinton Van Rooyen (62% stake).
Trustco operates three major segments: Insurance and its Investments; Resources; and Banking and Finance. The group is present in Namibia, Sierra Leone, Mauritius and South Africa.
Positive recent developments in relation to diamonds and properties. Trustco recently received mining licences for its two diamond mines, which hold resources of c6.8mn carats of high-value diamonds; production should start next year. The property portfolio is expected to generate strong sales and fair-value gains, particularly given the recent provisional approval to establish a township on one of its largest property assets, Farm Herboths.
Recurring profits to grow strongly in the medium term. Trustco has assets of NAD6.7bn (US$455mn), concentrated mainly in loans and property investments. It reported profit before tax of NAD606mn (US$41mn) in 2019 but, excluding one-offs, there was a loss before tax of NAD633mn (US$43mn). We expect recurring profits to grow rapidly on the back of income generated from the diamond assets, higher property sales and fair-value gains, and a growing student loan book, for which debt funding is expected to be obtained in the near future. These factors should support a healthy increase in operating cash flows from 2021f onwards.
Valuation: We value Trustco using a sum-of-the-parts methodology. We apply a 25% discount on account of potential dilution for share issuances related to the Huso Transaction and a further 15% conglomerate/control discount (limited free float and related-party transactions). We see 37% of the group’s value from Insurance, 31% from Resources, 17% from Banking and 14% from other activities. At our target price of NAD7.91, the shares trade at 6.2x 2020f PE and 15.0x 2021f PE.
Key risks: i) The company’s operating cash flows have been negative in each of the past three years and are expected to remain so in 2020f, thus requiring further debt and equity raising; ii) Trustco has exposure to unsecured student loans, which is potentially high risk (although there is security in place in the form of a government deduction code and credit insurance); iii) actual diamond resources could vary from the initial estimates, and property fair values are sensitive to external factors.
This report has been commissioned by Trustco Group Holdings Limited (Trustco) and independently prepared and issued by Tellimer for publication. All information used in the publication of this report has been compiled from information provided to us by Trustco and publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Tellimer at the time of publication. The sponsor has had no editorial input into the content of the note, and Tellimer’s fees are not contingent on the sponsor’s approval of the research.