Why I Bought Clientele Ltd

Clientele Limited (JSE:CLI) is one of my newest holdings. The company is in South Africa and is primarily in the business of providing insurance to individuals of modest means. Clientele provides life, health, funeral, legal, and estate insurance. It also provides annuities. Other than financial products, it generates 10% of revenue as a mobile services provider.

The company's business model is unique. Most insurance companies do not serve the low-end demographic because the policy premium is not worth the cost to acquire it. But Clientele has thrived in this area.

Clientele manages its costs of acquiring policies by outsourcing the work to francisees, called Independent Field Advisors (IFA), who themselves buy the company's products. The company does a lot of its advertising using late night informercials. In this way the company has kept the cost of acquisition at just below 50% the cost of the policies.

Clientele started its business only 23 years ago by the Enthoven family. The low-profile Enthoven family built its wealth in South Africa specializing in the insurance sector. The family owns 80% of the company through a holding company and they also own the Hollard Group of insurance companies. The Hollard Group in turn owns 9% of Clientele through a subsidiary. So, the Enthoven family has indirect control of almost 90% of Clientele.

Clientele has had phenomenal growth, as the chart below shows. While the company has grown steadily through the years, it has done so without losing underwriting discipline. The company's loss ratio — the money paid out in claims to the total premiums — has actually been falling. The loss ratio for the years 2017 to 2020 has been 23%, 22%, 20% and 20% respectively.

	CLI
Price	R 9.49
Earnings TTM	R 329.00 M
Marketcap	R 3182.00 (US$212 M)
ROE (%)	32.50
PE	9.67
PTBV	3.27
Div Yield (%)	10.01

Being such a good performer, one would think the company's valuation metrics are high. But that isn't the case, as the side table shows. This stock yields 10% earnings and dividends! A look at the price chart below gives some indications why. The stock has dropped precipitously through the COVID crisis even though the company's earning power has not been drastically affected. In the last three fiscal years, from 2018 to 2020, the net income did drop. The drop from 2018 to 2019 was mainly due to a large drop in investment gains. The drop from 2019 to 2020 was mainly due to odd tax accounting. The EBIT was actually rose significantly from 2019 to 2020. Furthermore, I've noticed when the Rand falls in value South Africa stocks fall also. So when the Rand vs the USD curve rises in the chart, it means the Rand is getting cheaper. And one would expect Clientele price to fall. And vise versa. But in recent weeks, the Rand price has been falling and yet Clientele is not rising. So, unless I am missing something this is a big mispricing.

For the last several years I have held a strong belief that the US markets are overvalued. I believe this more than ever now. I believe we may be at an inflection point for the emerging markets. The value of the Rand as shown in the previous chart may be a good proxy for this. Note how it rose for pretty much the last ten years but it has handily recovered from the all time lows of the COVID crisis. There is no more room for the US stockmarket to grow, and emerging markets is where the stock growth will come from in the coming decade. Clientele could be a very good illistration of this.

We shall see.