Good first half aided by markets and acquisitions

Chesnara has announced its 2023 interim results. Good returns in equity markets, most notably in Sweden, and the benefit from acquisitions meant earnings were well ahead of our normalised estimates. Economic Value profit was £61.0m, including £28.4m from acquisitions, compared with a loss of £75.7m in 1H’22. Despite paying the final dividend, Economic Value increased 2% over the half year to £523.2m. Cash generation was solid, with commercial cash generation of £21.8m, while base cash generation was lower after the symmetric adjustment at £11.1m. As expected, the interim dividend was increased by 3% to 8.36p 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: There were several operating lines that were better than expected and this has led to significant upgrades to our estimates. Our 2023E EPS is increased by 19% to 56.9p while our 2024E EPS increases 25% to 38.6p. Our 2024E Economic Value increases 2% to 375p per share.
• Valuation: With a price at approximately 75% of its forecast Economic Value, Chesnara seems undervalued. A prospective dividend yield of 8.9%, 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.