Could be the least worrying dividend you’ll get

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.

• Strategy: Growth in policies will come from acquisitions and ongoing new business. After a difficult couple of years, the latter should recover well into 2022. As of summer 2020, Chesnara had £120m of resources for acquisitions and, with five deals since 2017, is actively creating value via this route too.
• Acquisitions: In autumn 2021, Chesnara announced the acquisition of Sanlam’s UK life insurance businesses and Robein Leven in the Netherlands. At £.52m (debt-funded) for £65m of Economic Value, they are immediately value-creative. This will also add c.£7m p.a. of cash generation, less funding costs.
• Valuation: With a price at roughly two thirds of its Economic Value, Chesnara seems undervalued. A prospective dividend yield of 8.2%, with good prospects of continued growth, also suggests an undervalued stock.
• Risks: Ultimately, the company remains tied to movements in financial markets and adverse developments in operational areas. Having just come through a challenging period for the latter, in particular, we can see how well Chesnara can manage these.
• Investment summary: Chesnara aims to be the “least troublesome source of sustainable, attractive dividend yield”. A close analysis reveals that there is substance underlying this aim. In our opinion, the discount to Economic Value looks wider than it should, and the yield appears high for a dividend that is both secure and growing.