Nice little acquisition

Chesnara has announced its first acquisition of 2023. It is buying the onshore protection business from Canada Life’s UK business. This consists of 47,000 term assurance and critical illness policies. Chesnara is paying £9m for the policies, and expects the Economic Value to be £16m – so this is a bit smaller than some of its more recent deals. The uplift of £7m increases Economic Value by ca.1.4%. Cash generation will be improved by ca.£16m over the next five years. This benefit is relatively front-end-loaded; so there will be a smaller cashflow benefit beyond the five years. This will have an almost neutral effect on the Solvency II ratio.

• UK administration: Chesnara has also announced a strategic partnership with SS&C Technologies for the administration of its UK operations. SS&C is an established provider of technology and administration services. Chesnara expects it to help with both ongoing administration and future M&A.
• Estimates: The Canada Life deal has led to small upgrades to our figures. We have increased our Economic Value earnings estimates by 1%. Cash generation sees a stronger effect, with our estimate increased by 8% for 2023 and 7% for 2024. Our 2023 and 2024 Economic Value per share estimates are also 3% higher.
• Valuation: With a price at under 80% of its forecast Economic Value, Chesnara seems undervalued. A prospective dividend yield of 8.4%, with good prospects of continued growth, also suggest 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.