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19 Jan 2024
Western Cash, Eastern Promise
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Western Cash, Eastern Promise
Ageas (AGS:EBR), 0 | ageas SA/NV (AGS:BRU), 0
- Published:
19 Jan 2024 -
Author:
O''Mahony Dominic DO | Pearce Iain IP -
Pages:
89
High yield, high growth, a sustainable dividend. So what''s the issue?
China. Ageas has the 4th highest ordinary dividend yield in the sector. It is also forecast to be in the top quartile of net income growth from 2024 - 28. This appears something of a valuation anomaly. Ultimately, this is a result of Ageas''s unique structure and its Chinese exposures which have de-rated significantly. We believe this de-rating is too extreme. Even our conservative cash-based valuation yields significant upside. As such, we re-initiate Ageas on Outperform, EUR47 target price.
What are Ageas''s Chinese Holdings worth?
The main debate on Ageas is how much value investors should attribute to its Chinese holdings. Currently, we think the market is attributing a valuation in the range of EUR500 - 700m, based on the China Taiping share price and our implied sum-of-the-parts. On certain valuation multiples this looks extreme even given the current elevated risks. For example, this would be just 0.05x 2025E consensus Embedded Value or c2x 2025E earnings.
High dividend growth can be sustained in the medium term
Investors also question the sustainability of capital returns given tight remittance headroom. However, management actions have created significant cash flexibility at the Holding company. This can more than cover capital return requirements at a time when Asian remittances are expected to be depressed. This allowed the company to extend the 6-10% p.a. DPS growth guidance beyond 2024.
Risk-reward skewed in favour of shareholders
Overall, with a such a high capital return and such a low valuation attributable to the Asian exposures, we see the risk-reward skewed in investors'' favour. A highly adverse scenario appears to already be priced in. This allows investors to collect a highly attractive and sustainable yield, whilst any change in sentiment towards China could lead to material upside.