Another fine acquisition

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.

• Capital: The book is being bought for a nominal sum, with Chesnara adding £35m of capital. Of this, £14m will come from Waard’s existing resources and £21m from the group. The acquisition is expected to increase group Economic Value by £18m, 3% of the 2021 year-end total.
• Estimates: The transaction has increased our normalised 2022E EPS by 35%, to 41.9p, while our 2023E EPS rises by 4%, to 27.3p. The first half saw weak equity markets and rising bond yields. While we have not adjusted our estimates, the interim results are likely to bring a fall in Economic Value.
• Valuation: With a price at approximately two thirds of its Economic Value, Chesnara seems undervalued. A prospective dividend yield of 8.1%, 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.