The First Mutual Holdings Limited proposed transaction

BATANAI MATSIKA

Zimbabwe Stock Exchange (ZSE) listed First Mutual Holdings Limited (FMHL) has scheduled a Virtual Extraordinary General Meeting (EGM) for Monday, 5 October 2020 at 1000hrs.

The EGM will seek shareholder approval for the restructuring and capitalisation of FMHL reinsurance businesses.

According to the circular, the proposed transaction will be effected following the establishment of a new holding company in Botswana (First Mutual Reinsurance Holdings), which will own 100% of the two subsidiaries (First Mutual Reinsurance Company Limited (Zimbabwe) and FMRE Property & Casualty (Proprietary) Limited (Botswana)).

A Botswana private equity firm Aleyo Capital (Proprietary) Limited whose principal investors are Botswana-based pension funds and institutional investors, has been identified as the financing partner for the capital raising exercise.

Aleyo is to subscribe for a 29.1% shareholding in First Mutual Reinsurance Holdings for BWP 61.0m (USD 5.3m).

Aleyo Capital is a Botswanabased investment management firm, specialising in private equity and Mezzanine investments in Southern Africa.

The firm is co-founded and led by two partners and an investment team with significant experience in private equity investing and operating businesses in Botswana and the sub-Saharan Africa region.

The firm invests in high growth, market-leading businesses with potential to generate superior returns for investors.

The rationale of the proposed transaction is as follows;

•Volatile risk factors associated with the Zimbabwean economy imply the need to restructure and boost capital levels for the reinsurance business; and

• The funds raised will also be utilised to capitalise the two businesses and to further boost the subsidiaries’ solvency, liquidity and other technical considerations to support growth initiatives;

• Easy accessibility to foreign currency in Botswana and a conducive environment for business growth.

According to the circular, a binding agreement has been signed with Aleyo, subject to approval of the proposed transaction by shareholders at the EGM.

The USD5.3m valuation for a 29.1% stake implies a total valuation of USD18.3m for the two entities.

That said, FMHL has managed to maintain a good financial performance on the back of the Botswana business which provides returns hedged from local macroeconomics.

We note that the outlook for price stability remains positive in Botswana as inflation is forecast to be within the 3% to 6% objective range in the medium term.

The Bank rate was maintained at 5% and y-o-y inflation was 2.2% as of December 2019 (FY2018: 3.5%).

On the other hand, the Zimbabwean market has presented risks for insurance players as expenses on claims have been moving faster than premium adjustments.

All in all, the transaction will provide a platform for further M&A activity and for FMHL to raise additional capital so as to expand in regional markets.

Management has cited that if the transaction is not executed, First Mutual’s reinsurance businesses will remain sub-optimally capitalised and will not be able to take advantage of the opportunities in the regional reinsurance space.

As Morgan & Co Research, we see upside potential in the group’s regional diversification efforts.

We maintain our BUY call on FMHL and recommend investors to Vote in favour of the resolutions tabled.

Batanai Matsika is the Head of Research at Morgan & Co, and Founder of piggybankadvisor. com. He can be reached on +263 78 358 4745 or batanai@ morganzim.com / batanai@ piggybankadvisor.com.