Showing good operational progress

Chesnara announced its 1H’25 results. The main features were a better-than-expected operational performance, weaker economic returns and increased central costs but improved cash generation. An Economic Value loss of £11m was behind recent figures (1H’24: profit of £20m). Alongside the dividend payment, this loss reduced the Economic Value, which declined from £531m to £517m in the first half. Cash generation of £37m was a 28% increase over the 1H’24 figure of £29m. The interim dividend, as expected, was increased by 3% to 7.70p. Post the rights issue, Chesnara joined the FTSE 250 Index.

• Acquisitions: There were no further strategic updates on the HSBC Life UK transaction, but there has been significant progress in funding since July. The rights issue was completed as expected and Chesnara also raised £150m from a restricted Tier 1 instrument issue.
• Estimates: With weak economic results we have downgraded our estimates. We have decreased our 2025E EPS from 25.0p to 11.8p and our 2026E EPS from 65.7p to 57.0p. Our dividend forecasts are unchanged, with expected growth of 6% over the next 12 months.
• Valuation: With a price at ca.83% of its forecast post-transaction Economic Value, Chesnara seems undervalued, in our view. A prospective dividend yield of 8.3%, with good prospects of continued growth, also suggests an undervalued stock, in our view.
• Risks: Ultimately, the company remains tied to movements in financial markets and adverse developments in operational areas. Making a large acquisition also brings some execution risk, but Chesnara has good experience in managing smaller deals successfully.
• 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.