Sagicor Financial: Well-Capitalized Caribbean Value Play (OTCMKTS:SGCFF)

Introduction

Sagicor Financial Company Ltd. (OTCPK:SGCFF) is a Barbados-based financial services company founded in 1840. Sagicor listed on the Toronto Stock Exchange in 2019 through a transaction with Alignvest Acquisition II Corporation raising US$450 million in new equity (TSX: SFC). Sagicor is a US$745 million market cap financial holding company engaged in a range of financial services, including life & health insurance, annuities, pension administration, property & casualty insurance products as well as securities, real estate and commercial banking services.

Investment Thesis

Sagicor is a strong, well-performing Caribbean-based company with a 180-year corporate history and demonstrated ability to grow revenue and EPS. It is my thesis that the Caribbean will be the beneficiary of several economic growth drivers that will boost regional growth with ESG/SDG focused investment in the region and the impact of the major oil discoveries in Guyana and Suriname serving as major economic drivers.

I believe that Sagicor, meriting investment purely on its own historical performance, will benefit from these favorable macro trends. Sagicor is a high-quality company with undervalued shares and excellent regional growth prospects. I look for Sagicor to double over the next year on valuation alone as investors become aware of this great company based out of Barbados.

Share Price Valuation and Performance

Without a lot of time to build market support following the close of its 2019 transaction with Alignvest, Sagicor shares have been hit hard in the Covid-19-induced sell-off in early 2020. The shares have only partially recovered reflecting continuing concerns about the impact of the pandemic in its core markets.

Source: Financial data per Sagicor. All calculations per Author.

However, the company has a very strong balance sheet both in terms of asset quality, liquidity and leverage. Rated BB by S&P and Fitch, AM Best in its September 2020 affirmation of Sagicor’s A- Financial Strength Rating stated:

The ratings of Sagicor Life Inc. reflect its balance sheet strength, which AM Best categorizes as very strong, as well as its adequate operating performance, favorable business profile and appropriate enterprise risk management.

While AM Best has concerns with regard to global economic headwinds impact to operating performance metrics for companies operating in the Caribbean, Sagicor’s corporate structure with more of an international footprint, along with the recent capital raise during the past year mitigates AM Best’s short-term outlook concerns for the Sagicor group of companies.

Sagicor Financial Overview

Sagicor derives about 65% of its approximate US$1.6 billion per year (1st half 2020 annualized) in revenue from the Caribbean with its largest single Caribbean market in Jamaica. The company’s operations in Jamaica boast a very attractive and consistent return on equity of 15% to 20%. Trinidad is poised to be a significant indirect beneficiary of the growth in Guyana fueled by the major oil discoveries of Exxon Mobil (NYSE:XOM) and partners offshore Guyana.

Sagicor OverviewSource: Sagicor Financial 2Q2020 Investor Presentation.

About 35% of Sagicor’s business is in the United States which is also a growth market for the company as shown in the graph below.

Sagicor Revenue Growth

Source: Sagicor 2019 Annual Report.

With 15-20% ROEs and consistent growth in net income, Sagicor Jamaica is well-positioned to benefit as economic growth picks up in Jamaica in future years due to a disciplined ongoing restructuring of the economy.

Sagicor Jamaica OperationsSource: Sagicor 2019 Annual Report

Sagicor 5 Year SummarySource: Sagicor 2019 Annual Report.

Share Repurchase Authorization

Originally 3 million shares authorized with 2.39 million repurchased through August 28, Sagicor upsized the authorization on September 4, 2020 to up to 8 million shares. The company has plenty of capital available and at the price offered in the market, the repurchases are highly value accretive. The share repurchase program provides a backstop for investors.

Sagicor Share Repurchase ProgramSource: Sagicor Financial 2Q2020 Investor Presentation.

Risk Factors

Until a vaccine is available, the impact of Covid-19 on tourism will continue to hamper the short-term economic prospects of Sagicor’s core markets. Sagicor is relatively unknown and a lack of liquidity in the shares could result in significant short-term volatility. It is possible the shares will continue to trade at a discount to book value given its relatively low profile in the investment community.

Recommendation

While the continuing fallout from Covid-19 is a challenge for the Caribbean markets served by the company, the long-term fundamentals of the region combined with the strong historical performance of Sagicor set the table for superior share price performance over the short and long term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.