Steady as she goes!

Chesnara has announced its 1H’24 results. The main features were positive equity market returns, offset to some extent by further adverse lapse experience. Economic Value profit of £20.2m was behind the 1H’23 result of £32.6m (excl. acquisitions). Economic Value saw a small decline to £508m, from £525m at the year-end, with the dividend payment and forex losses offsetting the earnings. Cash generation was solid, with base cash of £19.6m and commercial cash generation of £29.2m. The interim dividend, as expected, was increased by 3% to 8.61p. This will be the 20th consecutive year of dividend increases.

• Acquisitions: Again, there was little new on acquisitions, other than an update on the progress of the Canada Life deal. Chesnara has continued to be active in seeking new deals, with two in the period going to diligence but falling through. Reassuringly, one was on value basis, showing management discipline.
• Estimates: A couple of operating lines were worse than expected, which has led to a downgrade to our estimates. Several adjustments, most notably to operating experiences/assumptions, have led to downgrades of our 2024E EPS, to 31.1p from 33.7p, and our 2025E EPS to 32.3p from 34.5p.
• Valuation: With a price at approximately 70% of its forecast Economic Value, Chesnara seems undervalued. A prospective dividend yield of 10.0%, 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 is able to 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.