Great cash flow in tough markets

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.

• Acquisitions: There was little incremental news on acquisitions, other than updates on completion. The gains on acquisition are slightly higher than expected, but base steady state cash generation is in line with expectations. With integration almost complete, Chesnara is ready for further M&A.
• Estimates: While 2022 was behind our estimates, we expect the acquisitions to contribute more going forward, leading to slight upgrades to our 2023 estimates. The net effect is to increase our 2023E EPS from 29.1p to 29.7p. We have introduced a 2024E EPS of 31.0p.
• Valuation: With a price at approximately 85% of its forecast Economic Value, Chesnara seems undervalued. A prospective dividend yield of 7.9%, 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 testing period for the latter, in particular, we can see how well Chesnara can manage these challenges.
• Investment summary: Chesnara has three pillars for delivering value, under a responsible risk-based management. A close analysis reveals that there is substance underlying these aims. 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.