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Valuation – CSN trades at 1.0x SII TierI NAV with a cash RoSII Tier I NAV of 10% and a DPS yield of 8%, while offering c.15% upside to our 330p TP. We reiterate our Buy recommendation.
Chesnara Plc
The relatively new management team is demonstrating an increased cadence of M&A deals, which, importantly for a closed book consolidator, has helped to elongate the free cash flow profile and secure what was already a rock-solid dividend for several years. The recently announced transformational HSBC UK Life deal creates positive jaws between the free cash flow and dividend yield over the medium term. There is a step up in the dividend next year, and we forecast it to expand at 3-5% over our forecast period. The half-year results show strong cash generation and readily available fire power for further M&A. Highly Secure, Buy Chesnara.
CSN trades at 1.0x SII Tier I NAV with a cash RoSII Tier I NAV of 10% and DPS yield of 8%, while offering 19% upside to our new 330p TP (previously 300p). We upgrade to Buy as CSN extracts value from the Life back book.
After a longer wait than planned, Chesnara has announced a large acquisition, HSBC Life (UK). At a cost of £260m, it is over 70% of Chesnara’s pre-announcement market capitalisation and will be funded by a mixture of equity, existing cash resources (primarily from the earlier Tier 2 bond issue) and drawing down from a newly increased revolving credit facility. The rights issue should complete by 23 July 2025, with deal completion in early 2026. There is a one-off additional uplift to the dividend per share (adjusted for the rights issue) of 6%, which will apply to the 2025 final and 2026 interim dividends.
Chesnara announced its 2024 results, which showed positive progress compared with 2023. The main features were positive market returns, offset by some mixed operational experience. Economic Value profit of £69.1m represented a 17% increase on the £59.1m in 2023. Economic Value increased to £531m, up slightly on £525m 12 months earlier, with a negative forex impact as well as dividend payment. Cash generation was excellent, with base cash increasing to £51.6m and commercial cash to £59.6m. The dividend, as expected, was increased by 3% to 24.69p. This is the 20th consecutive year of dividend increases.
Management delivered strong cash generation to support the uninterrupted dividend growth, debt interest, and central costs of the group. The recent acquisition of Canada Life’s unit linked book has been even more value accretive to the Economic Value than initially thought, which is now reflected in our numbers. We continue to expect management to seek out further consolidation across the European Life insurance markets in a disciplined manner given the substantial fire power to hand – this will ultimately grow the economic book value. Meanwhile the dividend is now in its 20th year of uninterrupted growth, which has compounded and translated to a total shareholder return of over 9x. We revise our target price up from 380p to 400p given the better than expected Economic Value and visibility on the cash generation. The attractive and expanding dividend yield, of which there will be plenty after twenty, is a key reason to own the stock. We reaffirm our Buy rating.
We preview earnings ahead of the FY24 results later this week. We continue to expect strong cash generation to support the uninterrupted dividend growth, debt interest, and central costs of the group. The recent acquisition of Canada Life’s unit linked book has been value accretive to the Economic Value, which is now reflected in our numbers. We continue to expect management to seek out further consolidation across the European Life insurance markets in a disciplined manner. We revise our target price to 380p as we switch to a prospective measure of the Economic Value. The attractive and expanding dividend yield is a key reason to own the stock. We reaffirm our Buy rating.
After an interval of 18 months, Chesnara announced a new acquisition just before Christmas. Although relatively small, it is another positive step for the company. The deal is a further acquisition from Canada Life UK, this time a portfolio of unit-linked bonds and legacy pension business, consisting of ca.17,000 policies and £1.5bn of AUM. The portfolio will transfer into Chesnara’s UK business, Countrywide Assured. Expected completion is at the end of 2025, subject to the Part VII transfer getting court approval. Having previously purchased a Canada Life UK term assurance book, the integration should be straightforward.
Management has successfully secured another small but highly attractive acquisition with Canada Life UK, this time focusing on a portfolio of unit linked policies resulting in an incredibly fast payback period and uplift to cash generation. Moreover, this still leaves management with all the firepower to conduct a larger transaction next year should the opportunity present itself. To this end the new policy administration partnership bodes well for migrating policies at scale and generating further efficiencies over time. This acquisition adds to the predicable cash generation which ultimately supports the uninterrupted dividend growth trajectory. We reaffirm our Buy rating.
Chesnara has announced its 1H’24 results. The main features were positive equity market returns, offset to some extent by further adverse lapse experience. Economic Value profit of £20.2m was behind the 1H’23 result of £32.6m (excl. acquisitions). Economic Value saw a small decline to £508m, from £525m at the year-end, with the dividend payment and forex losses offsetting the earnings. Cash generation was solid, with base cash of £19.6m and commercial cash generation of £29.2m. The interim dividend, as expected, was increased by 3% to 8.61p. This will be the 20th consecutive year of dividend increases.
Management reported strong 1H24 cash generation, which continues to support the dividend, central costs and the debt interest. The balance sheet is solid and insensitive to macro changes, relative to peers. The existing cash and capital buffers provide management with ample firepower for further M&A. To this end the new policy administration partnership bodes well for migrating policies at scale and generating further efficiencies from the back book. Continued participation in consolidation of closed books provides a reliable source of growth, whilst the predicable cash flows from the existing book has supported uninterrupted dividend growth for 20 years. We expect this trajectory to continue and reaffirm our Buy rating.
Chesnara has announced its 2023 results. Positive returns from equity markets and gains from acquisitions in the first half were somewhat offset by adverse changes to operating assumptions in the second. Economic Value profit of £59.1m marked a good turnaround from a loss of £85.1m in 2022. Economic Value of £524.7m was 2% higher than a year ago, reflecting the dividend payment and forex effects. The final dividend of 15.61p brought the full year up to 23.97p, a 3% increase over the previous year. Cash generation was good with base cash generation of £32.6m and commercial cash generation of £53.0m.
Management delivered a good set of figures for FY23, with highlights including underlying cash generation growth, liquidity and balance sheet strength. There is over £200m of readily available firepower for M&A along with ample management bandwidth despite recent acquisitions. The Chesnara Fan contributed to Economic Value growth, with each element of the fan delivering a positive result. This has ultimately supported a 19th year of successive dividend growth. We firmly believe the dividend growth will go Platinum when Chesnara marks its 20th anniversary since IPO. We reaffirm our Buy rating.
Chesnara has announced its existing CFO, David Rimmington, will be stepping down at its AGM in May following a successful ten years as one of the custodians of the business. His successor, Tom Howard, joins from Aviva with experience across its asset management, M&A, Life insurance, and UK & European operations. There will be an orderly handover until the new CFO arrives next year. To us the succession change comes from a position of strength and follows the recent changes made at the country management level. Whilst we bid the outgoing CFO a good bye we also rate Chesnara a good Buy. Management change. David Rimmington, existing CFO, will be stepping down following ten successful years at the next annual general meeting in May. He is to be replaced by Tom Howard who joins from Aviva Investors. Successful stewardship under existing CFO. David Rimington is stepping down after a decade of successfully managing the balance sheet, delivering implementation of key regulatory change programmes including Solvency II and IFRS17. He was also involved in the successful delivery of numerous M&A whilst ensuring an impressive dividend track record. New CFO background. Tom Howard joins from Aviva, where most recently he was CFO of its asset management business, Aviva Investors. He brings with him UK & European M&A experience in the Life insurance sector and a network which he can potentially use in any future transactions at Chesnara. Whilst we anticipate a good relationship with the CEO, we also expect that he will offer robust challenge to the CEO once he arrives, ensuring attractive acquisitions and good governance across the group given his technical experience. Why now? The Chesnara CEO, Steve Murray, has now been with the business for over two years and has re-energised the group to conduct M&A at pace. The new CFO is likely to bring a fresh perspective whilst the group may benefit from his experience of managing processes in a large organisation as it expands. The timing comes at a time of a series of successions across the country level portfolio, this change comes from a position of strength facilitated by an orderly handover. Strategic direction. We expect management to continue to seek out and execute M&A of Life insurance portfolios in a disciplined manner. The new CFO’s experience also lends itself in facilitating deeper conversations with its asset liability management providers. As ever, we expect management to continue to weigh the pros & cons of capital distribution versus deploying capital for growth. Investment case. With a well timed Tier 2 debt issue and solid balance sheet, management is now well positioned to take advantage of closed Life insurance opportunities. The Economic Value (EcV) is not immune to market volatility, but a clear vision and focus on value & dividend enhancing acquisitions and new business gives us confidence the EcV will continue to grow through the cycle. Valuation. The shares are trading on a c25% discount to EcV at 30 June of 347p per share. Which fails to reflect the growth opportunities, outlook, and realistic value of the business. The 2023E dividend yield is attractive at 9.2% and likely to continue to grow.
Chesnara has announced its 2023 interim results. Good returns in equity markets, most notably in Sweden, and the benefit from acquisitions meant earnings were well ahead of our normalised estimates. Economic Value profit was £61.0m, including £28.4m from acquisitions, compared with a loss of £75.7m in 1H’22. Despite paying the final dividend, Economic Value increased 2% over the half year to £523.2m. Cash generation was solid, with commercial cash generation of £21.8m, while base cash generation was lower after the symmetric adjustment at £11.1m. As expected, the interim dividend was increased by 3% to 8.36p per share.
Outlook – the integration of the recent transaction is running smoothly and the business seems well positioned to do further M&A deals with sufficient firepower at a Holdco level. The shares trade at a discount to NAV (0.8x) with cash returns in the low teens and an attractive 9% yield. We reiterate our Add recommendation and 300p target price.
Management delivered interim numbers showing resilient cash generation, liquidity and balance sheet strength. There continues to be over £100m of firepower readily available for M&A along with ample management bandwidth despite recent acquisitions. The Chesnara Fan contributed to Economic Value growth, with each element of the fan delivering a positive result. This clearly bodes well for the rest of the year as management actions, designed to drive capital efficiencies, are typically concluded in the second half. We expect these results will lead to further questions on the appropriate pace of growth of the dividend, now in its 19th consecutive year of uninterrupted growth. We reaffirm our Buy rating.
Cash generation – we have brought forward cash generation, offset by a decline in NAV, and stick with our 300p TP. CSN trades at 0.8x NAV, supported by a c.9% dividend yield and in our view offers attractive long-term value. Add.
Chesnara has announced its first acquisition of 2023. It is buying the onshore protection business from Canada Life’s UK business. This consists of 47,000 term assurance and critical illness policies. Chesnara is paying £9m for the policies, and expects the Economic Value to be £16m – so this is a bit smaller than some of its more recent deals. The uplift of £7m increases Economic Value by ca.1.4%. Cash generation will be improved by ca.£16m over the next five years. This benefit is relatively front-end-loaded; so there will be a smaller cashflow benefit beyond the five years. This will have an almost neutral effect on the Solvency II ratio.
CEO podcast series. We hosted Steve Murray, CEO of Chesnara plc, discussing a range of topics including why he does not feel the need to splash out on larger M&A. Currently, opportunities exist to conduct smaller deals with higher returns on capital. This was evidenced in the recent acquisition of Canada Life UK’s protection policies. So, whilst investors might want Steve Murray to do a larger deal, sooner rather than later, it is clear he will only move for the right deal – in other words never hurry a Murray. Click here to watch the full video.
Management announced the acquisition of a portfolio of individual protection policies from Canada Life UK. The size of the transaction is small, representing c3% of group EcV, but perfectly formed from a financial perspective offering c78% return on capital in year one, having been purchased at a deep discount (44%) to book. Moreover, the uplift to cash generation over our forecast period (5-6%) is disproportionate to the size of the transaction. We hope to see similar deals in the near future. Reaffirm Buy rating.
Chesnara has announced its 2022 results. With weak equity markets and rising interest rates and credit spreads, the risk asset exposure weighed on results. Economic Value profit came in at a loss of £106.1m, compared with a profit of £57.8m in 2021. The balance sheet Economic Value also reduced from 416p to 340p at 31 December 2022 (although there’s a gain from Conservatrix to be added in January). Group cash generation, the movement in its surplus, was excellent. Base generation for the group was £82.7m, compared with £20.3m in 2021 As expected, the dividend was increased by 3% to give a total of 23.28p per share.
Management reported FY22 results demonstrating resilient cash generation despite negative equity markets and rising credit spreads over the period. A 3% uplift in the dividend continues to be supported by cash generation and the long-term predictable nature of its cash flows. A strong balance sheet and liquidity at the holding company have been achieved by a well-timed debt raise and cash generation, positioning the group for further acquisitions of similar size to the three recent deals. Meanwhile, the dividend yield pays an attractive income. Reaffirm Buy rating.
Having been on the road recently we came across a number of what we can only describe as myths. We take this opportunity to discuss these points more broadly and hope to debunk some if not all of the myths we encountered. A selection of the comments we came across may be true in absolute terms, but we aim to contextualise the discussion to the Life Insurance sector where, for example, debt leverage is generally higher than cyclical sectors, in part due to the stable and long-term predicable cash flow profile of the sector. Chesnara’s sensitivity to equity markets, which investors are mindful of right now, is essentially the same as that which a traditional asset manager may experience i.e. fluctuations on assets under administration, rather than increased risk to the shareholder balance sheet. Management has clearly positioned the business to acquire further closed books following the recent debt raise, giving it a solid balance sheet, at a time when others may be facing heightened challenges. Reaffirm Buy rating. Having been on the road recently we came across a number of what we can only describe as myths. We take this opportunity to discuss these points more broadly and hope to debunk some if not all of the myths we encountered. A selection of the comments may be true in absolute terms, but we aim to contextualise the discussion to the Life Insurance sector where, for example, debt leverage is generally higher than cyclical sectors, in part due to the stable and long-term predictable cash flow profile of the sector. Chesnara’s sensitivity to equity markets, which investors are mindful of right now, is essentially the same as that which a traditional asset manager may experience i.e. fluctuations on assets under administration, rather than increased risk to the shareholder balance sheet. Hindsight shows the recent debt raise was timed brilliantly, positioning the business to capture further acquisitions from potential distressed sellers.
We hosted Steve Murray, CEO of Chesnara, for a roundtable with investors yesterday to discuss recent themes from across the sector. Management confirmed no exposure to the LDI fiasco seen elsewhere, whilst confirming the positive net benefits from the Brexit Dividend in the guise of a relaxation of the capital regime across the UK to the tune of £5-£10m or single digit ppts on the capital coverage ratio. There remains the possibility to harvest additional benefits through asset allocation switches to higher yielding illiquid assets which will benefit from more favourable capital charges, ultimately leading to better margins. The impending recessions in UK & Europe seem very manageable given the product mix (life & term assurance) are unlikely to see a rise in lapses, whilst headwinds on new business represent a small proportion of the core business. M&A capacity, both operational and financial, is readily available to deploy across the territories with the recent market volatility presenting opportunities from owners of insurance books keen to rationalize their portfolios. We reaffirm our Buy rating.
Chesnara has announced its 2022 half-year results. With weak equity markets and rising interest rates and credit spreads, the risk asset exposure weighed on results. Economic Value profit came in at a loss of £89.6m, compared with a profit of £38.5m in 1H’21. The balance sheet Economic Value also reduced from 416p at the year-end to 351p at 30 June 2022. Group cash generation, the movement in its surplus, was much more robust. Base generation for the group was £21.9m, more than the figure for 2021 as a whole. As expected, the interim dividend was increased by 3% to 8.12p per share.
1H22 results overshadowed by market volatility We had been expecting a lower 1H22 economic value due to the weak financial markets, however it was c.7% worse than we had pencilled in (351p per share). However, the impact on the capital position was modest; the solvency position remains strong (195%) and the firepower to undertake further M&A deals and grow the DPS remains undiminished. A greater focus on improving cash generation, including the contribution from M&A deals, is already noticeable, which is positive. At 0.87x SII NAV combined with a 7.5% dividend yield the shares remain attractively valued in our view. We reiterate our Add rating. Andreas.VanEmbden@peelhunt.com
Chesnara has had a busy and productive H1 with the completion of the Sanlam and Robein Leven acquisitions along with the proposed acquisition of Dutch life insurer Conservatrix. Despite this there has been strong commercial cash generation of £18.6m driving an increased interim dividend of 8.12p/share (+3%). The solvency position on 30 June was also strong at 195% (31 Dec 2021: 152%), well above the usual 140-160% operating range, reflecting the impact of the opportunistic £200m Tier 2 debt raise. As anticipated, H1 EcV earnings were impacted by short term economic conditions and the fall in equity markets which lowered EcV to £527m or 351p/share (31 Dec 2021: 416p). Despite the short-term volatility, Chesnara continues to deliver by growing the business and increasing dividends. We maintain our Buy recommendation and unchanged 420p target price.
Chesnara has announced its seventh acquisition in the Netherlands, buying the closed life insurance books of “Conservatrix”. The latter is a life insurance and mortgage provider that filed for bankruptcy at the end of 2020 as a consequence of strategic errors by its US owner. The new policies will be bought by Chesnara’s Waard subsidiary, increasing its policy count by ca.70% and assets under administration by ca.90%. While less significant on these measures for the group as a whole, the acquisition does add meaningfully to its expected cashflow; it is expected to add £4m p.a. to the group.
Value-added transaction Chesnara announced another backbook deal this morning, which is the third deal since refreshing its acquisition strategy at the beginning of 2022. The Dutch transaction creates additional economic value (+3%) and delivers a low-teen IRR, with the cash contribution supporting the dividend. There is scope for further synergies, which are not included in today’s economics. Post this transaction, the company still has sufficient firepower to do additional transactions going forward. We are positive about CSN’s strategic outlook and reiterate our Add recommendation, with the shares trading at 0.8x NAV (SII) and an 8% yield. Andreas.VanEmbden@peelhunt.com
Chesnara has announced the acquisition of a closed life insurance portfolio from previously bankrupt Dutch life insurer “Conservatrix”. The acquisition adds material scale to Chesnara’s existing Dutch run off business Waard, enhances future cashflow by c£4m/year, increases EcV by £18m or 12p/share along with potential further EcV accretion further out. Whilst there is no acquisition ‘cost’, Chesnara will contribute £35m to support the solvency position of the business being acquired. Following the acquisition which is due to complete at 2022-year end, Waard will become a material contributor to Chesnara’s progressive dividend policy. The shares are currently trading on an 33% discount to our 2022 EcV forecast of 424p/share which, together with the 8.2% dividend yield, highlights a very attractive buying opportunity.
Fresh strategic momentum Financial market volatility is likely to drag down CSN’s 2022E economic value (EcV) from 2021 Y/E levels, but scope for significant action to deliver new synergies should support EcV and cash generation in the medium term. A new M&A strategy should accelerate CSN’s potential to build value. We increase 2022E EcV by +4% and the SII Tier I NAV by +5% to 355p, with cash returns averaging 11% in the next three years. Our TP rises from 280p to 300p, offering 8% upside from current levels, and is supported by an 8% yield. We upgrade our rating from Hold to Add as CSN takes an active approach to create EcV. Andreas.VanEmbden@peelhunt.com 16-page note
Chesnara has announced its 2021 full-year results. The headline figures are good, with Economic Value earnings of £57.8m. Within this, there were strong positive results from economic variances. Operational variances showed the effect of the challenges to the Swedish business, in particular, although their negative contribution of £32.6m was a distinct improvement on the £49.9m loss in 2020. The final dividend increased by 3% to give a total for the year of 22.60p. On the balance sheet, the growth in Economic Value was offset by adverse movements in exchange rates; net, it shrank by 2%.
Chesnara has delivered yet again with strong commercial cash generation of £53.0m (+91%) leading to an increased final dividend of 14.7p (+3%) making 22.6p (+3%) (PGe: 22.6p) for the full year. Highlighting the sustainability of the dividend, the long-term cash potential is, in our view, sufficient to fund the 2021 dividend for more than 20 years. The solvency position remains robust with a SII ratio of 152% (31 Dec 2020: 156%) well within the targeted 140-160% range. Economic Value (EcV) reduced marginally to £624m or 416p/share (31 Dec 2020: 424p) (PGe: 411p) due to FX losses but is flat on a pro forma basis and inclusive of gains on competition from the latest acquisitions. Chesnara continues to deliver for shareholders and the recent Tier 2 debt raise increases its firepower for further EcV enhancing acquisitions. We maintain our Buy recommendation and 420p target price.
Maiden tier two debt issue Chesnara announced Wednesday afternoon that it had placed its first tier 2 debt with institutional investors. The £200m issue has 10.5 year duration and 4.75% coupon and is BBB- rated by Fitch, with stable outlook. The stated purpose of the issue was to provide financial flexibility and accelerate the company’s growth strategy. We understand the debt will be issued to fund the pending £39m Sanlam Life acquisition, repay c.£30m RCF outstanding and provide the fire power to fund future M&A. Another key rationale is the uplift to the solvency coverage ratio, which we had forecast in our recent sector note (here) would fall slightly below the 140-160% target range at year-end, pro-forma for its two recent deals. The £200m addition to Own Funds would take that ratio to the high 180s. Higher cost than bank debt, but positive for capital base We think the closest comparable debt is the £400m, 4%, 10.25 year issue by Utmost in September 2021, rated BB- by Fitch, and the £500m, 5.625%, 11 year issue by Phoenix in April 2020, rated BBB+ by Fitch. While the 4.75% coupon is higher than the Libor+2% on the company’s RCF, the ability to fund material future M&A without raising fresh equity provides optionality at a manageable incremental annual cost. Absent future M&A, this issue will take the SII ratio materially above Phoenix (166% at H1) and Utmost (176% YE20 pro-forma), but we would still see the 140-160% range as where the company wants to be in the medium-term. Coupon highlights value in the equity, yielding 8%, and rising We place our forecasts under review for higher interest costs ahead of FY results due March 31st. We think the issue reduces the risk of dilutive equity issuance to fund future M&A, and the coupon highlights value in the equity, yielding over 8% on our forecasts, with an unbroken track-record of regular dividend increases since IPO in 2004.
Life assurance consolidators should be boring most of the time, perhaps apart from when they do some M&A. Operationally, Chesnara has been close to achieving that, although recent events have made it challenging. Although cash generation has remained adequate in the past couple of years, the prospects of a calmer environment should bring a return to more meaningful surpluses again. A comfortable, but not overweight, capital position supports this. We expect continued, steady, operational and capital management activities to underpin the additional value that acquisitions and new business will bring in.
Another bolt-on. Chesnara is to acquire Robein Leven, a closed Dutch life insurer, for £13m, from Monument Re, a closed life consolidator operating in Europe. The price paid equates to a 21% discount to Chesnara’s estimate of Economic Value, as of year-end 2020, net of transaction costs. The purchase is to be funded from the cash in its Dutch run-off subsidiary, Waard. The deal is expected to close in H1 2022, subject to regulatory approval. Rationale is to add to cash flow. The purchase is expected to add c.£2m to annual cash flow with a duration of c.10 years. With a solvency ratio of 211% at year-end, the purchase will be dilutive to Waard’s very strong solvency (458% at H1) but the impact at a Group level is expected to be only 1-2%. The business acquired is predominantly unit-linked, and there is expected to be a small increase in the solvency sensitivity to equity market movements. Sixth Dutch deal in six years. Since first entry into the Dutch market, through the acquisition of Waard in 2015, only the L&G Nederland deal has been sizeable; nonetheless Robein is the fourth bolt-on in as many years. It follows the September announcement of the purchase of Sanlam Life & Pensions in the UK for £39m, which is expected to add £5m to annual cash flow. Further deals likely. Management said at the Interims at the end of August that it was “increasingly optimistic that good [M&A] opportunities are available for us”. While it has announced two deals since, we do not think this precludes further, potentially bigger, deals. We understand Chesnara could issue Tier 2 debt to fund the right deal, but believe it will be disciplined on price and risk profile, given strong visibility from the back book and new business. Valuation anomaly. Both the discount to Own Funds and high dividend yield stand out, particularly given 14 year track record of unbroken dividend growth.
Chesnara has announced the acquisition of Robein Leven in the Netherlands for £13m, a 21% discount to its EcV of £16.5m. We view the price being paid as attractive and well timed as it is only two months since the last deal was announced. The day-one gain will increase EcV by 2.4p/share, although we anticipate further shareholder gains from the acquisition in the short/medium term. The deal is funded from existing resources, from within its Netherlands-based consolidation business, the Waard Group. We welcome the deal as it highlights Chesnara’s ability to deliver value-creating acquisitions following quickly on from the recently announced Sanlam acquisition in the UK. Both deals enhance incremental cash generation, which in turn supports the progressive dividend policy. We anticipate further good accretive acquisitions and therefore believe that Chesnara should trade at a premium to its life peers. We reiterate our Buy rating with an unchanged TP of 420p.
Chesnara has announced the acquisition of Sanlam’s UK Life & Pensions (SLP) business for £39m, a 19% discount to its EcV of £48.1m. We view the price being paid as attractive when compared to recent acquisitions elsewhere in the UK market that have been at c10% discounts and set against Chesnara’s traditional price discipline. The day one gain (net of costs) will uplift EcV by 4p/share, although we anticipate further shareholder gains from the acquisition in the short/medium term. The deal will be funded from the Group’s new revolving credit facility and is a strong fit with its existing UK business. We welcome the announcement as it sends out a strong signal that Chesnara retains the capability of delivering value-creating acquisitions that enhance incremental cash generation, which in turn supports its progressive dividend policy. We anticipate further accretive acquisitions and therefore believe that Chesnara should trade at a premium to its life peers. We reiterate our Buy rating with unchanged TP of 420p.
Stable economic value as DPS rises Chesnara reported a relatively stable set of 1H21 results and holds sufficient cash at the holding company level to fund an increase in the DPS for the next two years. Cash support comes mainly from the UK back book, with European results mixed. Financial flexibility to do deals has however improved and, whilst so far has been mainly focused on Europe, CSN also sees opportunities in the UK. We see the shares as fairly valued at 0.8x SII Tier I NAV and we maintain our Hold rating. Andreas.VanEmbden@peelhunt.com
Chesnara has reported a good set of H1 2021 results. It has increased its interim dividend by 3% to 7.88p, supported by its resilient cash generation, solid Solvency position and new business despite market volatility and adverse FX movements. New business profit continues to grow despite the current challenging trading environment supporting further recovery in coming years. The newly established revolving credit facility of £100m and existing balance sheet strength provides firepower for potential acquisitions of up to c.£120m without redress to additional funding resources. We continue to believe in Chesnara’s ability to maintain its dividend policy whilst delivering value accretive acquisitions. We reiterate our Buy rating with unchanged TP of 420p.
Dividend growth in a challenging year Chesnara delivered another increase in the dividend despite a set of mixed results in a challenging year. Cash generation was held back and economic value declined modestly in 2020. Nevertheless, enough cash is being up-streamed from the life funds and held at the holding to comfortably fund the dividend. CSN’s strategy of optimising the back book, investing in new business and small acquisitions remains unchanged. The shares are sensibly valued at c.0.76x SII Tier I NAV and we maintain our Hold recommendation. Andreas.VanEmbden@peelhunt.com
Trading statement updating on dividend, capital and cash Key is the decision to recommend the payment of the 2019 final dividend of 23.4p, subject to approval at the AGM on 15th May. The decision was taken after extensive scenario analysis, allowing for the pending acquisition of ReAssure. Solvency surplus has improved by £0.9bn to £4bn at 24 April from year-end, with the ratio up from 161% to 172%. Despite current volatility, Phoenix has reiterated its 2020 cash generation target of £800-900m. New numbers do not include ReAssure We note that the bulk of the improvement in solvency surplus was due to £1.1bn of debt raised to part-fund the ReAssure acquisition. There was an underlying £0.2bn negative impact from economic variances, which is broadly in-line with previously published sensitivities. No update is given for ReAssure standalone, or a prospective financial position on a pro forma basis, but we take comfort from the decision on the dividend in this context. There are new sensitivities given for Phoenix standalone on the separate impacts from credit spread widening and to credit downgrades. Year-to-date, £10m of the £20.2bn bond portfolio has been downgraded to sub-investment grade and there have been no defaults. Clear strategy, unwarranted discount We see the current dividend yield in excess of 8% as flagging a good entry point for the shares. We note that Chesnara, with a comparable closed life acquisition strategy and open book, has performed very strongly since updating on its strong solvency position and commitment to the payment of its dividend at the end of March. Chesnara’s dividend yield has narrowed from north of 8% to 6.5%. Our price target for Phoenix is based on a 6.25% dividend yield. Notwithstanding the headwinds from the weakening economy, we see strong industrial logic in Phoenix’s pending acquisition of ReAssure, and opportunities for further consolidation as the life industry adapts.
Chesnara Plc Phoenix Group Holdings plc
Signals from politics, corporates, M&A markets, investors: The context of the global energy transition is changing with the emergence of an accelerating low-carbon electrification agenda. This is evident, for example, in Shell’s strategic mantra to be the largest electricity company in the world by 2030. Geographically, Europe is a particular focus with its accelerating de-carbonisation ambitions. M&A in developed EU markets is starting to reflect the new mood. SPW’s divestment of its fossil-fuel generation is just one example. Even in Kosovo, with its complex relationship with the EU, the political emphasis is apparently moving in favour of renewables. Among investors, ESG criteria now play a growing role, with coal assets under scrutiny. The result is that the valuation upside embedded in CG’s low-carbon portfolio and growth plans is partially clouded by Kosovo risk. Developments in Kosovo: There are growing signs that the Kosovo coal plant investment may be reviewed. Whilst CG has met its obligations to date and reached an agreement with GE to develop the asset, political will for the project appears to be waning as the focus leans towards renewables. Further, an EU-backed entity focussed on EU accession is making available €76m to clean up emissions from Kosovo B, suggesting support for extending the life of an existing asset rather than facilitating a new lignite plant. Clearing the clouds: We believe the broad path forward for CG in these circumstances is not overly difficult to imagine or articulate. Decisions can be made not just to the advantage of the CG shareholder base, but also opening up wider potential shareholders. CG valuation – significant hidden upside potential: The overall investment story is a positive one, an exciting equity story based on CG’s core strength of top-rated human IP across the value chain of electricity generation. We see scope for CG to accelerate its value creation in the coming years and play an important global role in the energy transition. We reiterate our BUY.
CSN COA GLO HSBA
Mid-sized acquisition in Holland extends cash profile The acquisition of the run-off book from Argenta Bank at a 17% discount to Own Funds for £25m will give a £6.9m Own Funds uplift for Chesnara and extend cash generation of the group. It will be cash funded by Chesnara’s Dutch run-off unit, Waard, into which it will be integrated. This follows a smaller (unannounced) acquisition of 6,500 term life policies. Cash generative add-on, with scope for synergies While modest in the context of group Own Funds of £588m at H1, the deal will extend cash generation for the Dutch run-off unit, give validation of the division’s ability to integrate other closed life books, and, according to the CEO, “create material synergies” – unquantified, on first view, as well as enhancing Own Funds per share. Shows business as usual, underlines undemanding multiple The deal also suggests that the model of closed life acquisitions at reasonable multiples, supported by open book growth, has considerable runway, despite recent headlines about higher price expectations on behalf of sellers. That a deal of this size can also be cash funded also underlines our view in our recent initiation (here) that the cash position is robust and a continuation of the 15-year track record of rising dividends is much more secure than the c.8% dividend yield would imply. With our price target based on a target dividend yield of 6%, we leave our price target unchanged, with our forecasts under review for an expected modest uplift to Own Funds per share.
Chesnara's CMD yesterday delivered two key messages: 1) The business remains firmly on track to be "an investor's least troublesome share, with dividends" and 2) Two thirds of the business is 'open' for new business. It was the latter that we think will start to change investor's perception of Chesnara's investment case. The valuation read across of it not simply being a closed life insurer seems obvious ( the shares should trade at a premium rather than a 24% discount to EcV at 30 June of 468p/share. We believe that the exit from the MSCI on 30 Nov has put short term pressure on the shares (down 9% in last two weeks) but that this has created an excellent but short term entry point whilst the medium/long term investment case remains rock solid. The shares have a current year dividend yield of 5.6%. Buy.
Chesnara's CMD yesterday delivered two key messages: 1) The business remains firmly on track to be “an investor's least troublesome share, with dividends” and 2) Two thirds of the business is ‘open' for new business. It was the latter that we think will start to change investor's perception of Chesnara's investment case. The valuation read across of it not simply being a closed life insurer seems obvious ( the shares should trade at a premium rather than a 24% discount to EcV at 30 June of 468p/share. We believe that the exit from the MSCI on 30 Nov has put short term pressure on the shares (down 9% in last two weeks) but that this has created an excellent but short term entry point whilst the medium/long term investment case remains rock solid. The shares have a current year dividend yield of 5.6%. Buy.
Chesnara has delivered another good set of results that extends its unbroken policy of growing its dividend along with strong growth in Economic Value (EcV). The IFRS pre-tax profit increased to £51.6m (H1 2016: £0.2m) helped by a £20.7m gain from the L&G Nederland acquisition (rebranded “Scildon”) whilst net EcV earnings increased to £105.8m (H1 2016: £3.5m loss) reflecting a £65.4m gain on acquisition. Cash generation was also good at £46.2m (H1 2016 £13.6m) leading to an increase in the interim dividend to 7.0p/share (+2.94%). The EcV was also better than anticipated at 467.7p/share (30 June 2016: 363.8p, 31 Dec 2016: 402.4p) leading us to increase our target price from 409p to 452p. Buy.
Chesnara has had a busy but successful 2016. It has continued to deliver good IFRS pre-tax profit and strong cash generation that, in turn, has enabled it to increase the full year dividend to 19.49p (+2.9%). The Economic Value (EcV) has increased to £602.6m (+33%) helped by the £70m capital raise and EcV earnings of £72.5m (+26%). The year-end EcV on a per share basis was 403p/share (2015: 360p) and this is set to increase further in 2017 with the gain on completion from the L&G Netherland acquisition that is now expected to complete on 6 April. We have raised our 2017F EcV forecast to 431p/share and with the shares trading at a 19% discount to this with a 5.7% dividend yield we increase our target price to 409p/share (405p) and reiterate our Buy recommendation.
In November Chesnara announced the acquisition of the ‘open’ Dutch life insurer Legal & General Nederland for €160m at a 33% discount to its Economic Value (EcV). The acquisition was financed by a combination of new equity, via a Firm Placing and Placing and Open Offer, existing cash resources and draw down on a new debt facility. We think that this is a superb acquisition that complements its previous Dutch acquisition The Waard Group whilst being both EcV and cah/dividend enhancing. Following the ending of the blackout period we re-commence coverage with a Buy recommendation and an increased target price of 405p/share from 395p/share previously.
Chesnara has confirmed that the £70m equity raise to part fund the acquisition of L&G Nederland has been very popular. It has received acceptances under the Open Offer (including the acceptances under the Excess Application Facility) in respect of 12.466m shares which represents 267% of the Open Offer shares. The General Meeting takes place at 11.00am today with dealings in the New Ordinary Shares expected to commence at 8.00am on 15 Dec 2016. Our corporate relationship with Chesnara requires us to maintain a suspended target price, recommendation and forecasts.
Chesnara has announced that it is to acquire the ‘open’ Dutch life insurer Legal & General Nederland from L&G for €160m (c£145m based on an exchange rate of €1.1/£1) which represents a 33% discount to its Economic Value (EcV). The acquisition will be financed via a combination of new equity, via a Firm Placing and Placing and Open Offer, existing cash resources and draw down on a new debt facility. The acquisition complements the existing Dutch closed life consolidation business Waard that Chesnara acquired in 2015. The business being acquired is well capitalised at 219% of it Solvency II requirement and is expected to be both cash and EcV per share accretive. The enhancement to the long-term cash generation is supportive of Chesnara’s dividend strategy. Our corporate relationship requires us to temporarily suspend our forecasts, target price and recommendation.
The H1 results from Chesnara show that despite the Brexit inspired impact of lower interest rates the company can still deliver good cash generation (H1 2016: £13.6m), an improved solvency position and yet another increase in the dividend to 6.80p/share (+2.9%) – the 12th successive rise in interim dividends. A virtually seamless move from the EEV concept to Economic Value (EcV) at £459.9m (31 Dec 2015: £453.4m) or 364p/share (31 Dec 2015: 359p/share) reinforces our view that the shares are good value whilst delivering a 5.9% dividend yield. Value enhancing acquisition opportunities continue to be sought and we believe such opportunities will have been enhanced post Brexit. Buy.
Chesnara has had another good year of solid delivery on its core strategic objectives. Net cash generation of £82.4m (+16%) benefitted from a maiden positive cash contribution from Movestic helping to increase the final dividend to 12.33p per share making 18.94p (+2.9%) for the full year. This is an impressive 11th successive year of annual dividend increases. The EEV NAV of £455.2m (+9%) or 360p per share reflected underlying EEV earnings of £57.5m and allowing for dividend payments of £23.5m. Both IFRS and EEV profitability were up strongly whilst the group remains well capitalised with a Solvency II ratio of 146%. The shares currently trade at a 15% discount to 2015 Embedded Value and based on our 2016F dividend yield deliver a very attractive 6.3% yield. We retain our Buy recommendation and believe that the recently announced FCA review that has negatively impacted sentiment has created an excellent buying opportunity.
The FCA has released a thematic review into the fair treatment of long standing customers in the life insurance sector. It flags concerns about customer communication in respect of exit and/or paid-up charges on some customers’ policies. A number of firms have been reviewed by the FCA with a smaller number being identified for further investigation, including Chesnara’s Countrywide closed life business. The FCA say that no conclusion has been reached and that they won’t make any further comment until further work has been concluded.
At the Chesnara Capital Markets Day yesterday the management team gave a very clear demonstration of the strengths of the business. Key takeaways for us included the potential acquisition opportunities in the UK and The Netherlands as a result of the introduction of Solvency II. In addition it was made crystal clear that any acquisition would be considered only if it had no detrimental impact on the continued growth of the dividend. Solvency II valuations are likely to be lower than ‘Embedded Values' for insurers but at Chesnara it is likely to be replaced by a similar concept such as ‘Economic Value'. The company doesn't do racy and remains “reassuringly dull”, delivering a 2016F dividend yield of 6.0% whilst trading at a 7% discount to our 2015F Embedded Value. We have no visibility on any acquisitions but believe any that follow will be attractively priced and dividend enhancing. We consequently maintain our Buy recommendation and 395p target price.
Chesnara has released a short Q3 trading update flagging that cash generation has proved resilient during the period despite the fall in equity markets. The volatile investment markets in Q3 led to a loss of £22.4m in the Embedded Value P&L but the Embedded Value at £425.5m or 337p/share was ahead of the £417.2m at 31 Dec 2014 albeit slightly lower than that at 30 June. It is worth highlighting however that a large proportion of the adverse equity market impact will have reversed post 30 September as markets have recovered. We welcome the reconfirmation that the impact of Solvency II on cash generation and group solvency is expected to be broadly neutral. The shares are trading only in line with EV, on attractive IFRS PE multiples whilst delivering a 2016F dividend yield of 5.7%. We consequently maintain our Buy recommendation and 395p target price that reflects our assumption of another EV enhancing acquisition in the short/medium term.
Chesnara has delivered yet another good H1 performance helped by the Waard Group acquisition that completed in May. Net cash generation of £56.7m (H1 2014: £15.6m) included a one off benefit from Waard Group of £39.9m, whilst operating activities contributed £15.3m including an inaugural positive contribution from Movestic. The interim dividend increased by 3.0% to 6.61p/share whilst the EEV NAV at 30 June was 349.1p/share (H1 2014: 348.5p/share). The pre-tax IFRS profit has increased to £30.4m (+11%) helped by a gain of £16.2m from the Waard Group that has enabled us to increase our 2015F IFRS EPS by 25% to 28.9p. A successful Solvency II “dry run” exercise has reinforced previously flagged expectations that SII, subject to consistent regulatory buffers, will not have an adverse impact on overall Group solvency which remains strong. The valuation remains attractive and the dividend policy continues to deliver. We maintain our Buy recommendation and 395p target price.
