Robust cash generation in challenging markets

Chesnara has announced its 2022 half-year 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 £89.6m, compared with a profit of £38.5m in 1H’21. The balance sheet Economic Value also reduced from 416p at the year-end to 351p at 30 June 2022. Group cash generation, the movement in its surplus, was much more robust. Base generation for the group was £21.9m, more than the figure for 2021 as a whole. As expected, the interim dividend was increased by 3% to 8.12p per share.

• Acquisitions: There was little incremental news on acquisitions, with those announced in 2H’21 completing in the first half. Chesnara has set out more on the market and its approach, giving greater insight into its strategy and options available to it, if required, for funding.
• Estimates: The market movements weighed strongly on our estimates for 2022, but had a lesser impact on our normalised 2023 figures. The net effect is to reduce our 2022E EPS from 41.9p to -27.1p while we increase our 2023E EPS by 7% to 29.1p.
• Valuation: With a price at approximately 85% of its Economic Value, Chesnara seems undervalued. A prospective dividend yield of 7.4%, 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.