The first half saw income investors’ favourite Chesnara PLC (LON:CSN) generate more than sufficient cash to fund its dividend strategy.
The life assurance and pensions company hiked its interim dividend to 7.21p from 7.00p the year before.
READ: Chesnara's acquisition of L&G Dutch insurance arm boosts 2017 results
The group generated cash of £48.6mln in the period but observed that this was boosted by a £26.8mln release of surplus capital previously constrained in the UK with-profit funds.
In the same period of 2017, the group saw cash outflow of £2.7mln but this period was also subject to a one-off distorting effect, namely the £55.3mln hit from the completion of L&G Nederland (now renamed Scildon).
The group solvency ratio improved to 157% at the end of June from 146% at the end of 2017.
The group saw a fall in its economic value (EcV) – roughly analogous to embedded value (the present value of future profits of a firm plus the net asset value of capital and surplus) – to £700.8mln from £723.1mln at the end of 2017.
The decline was attributed to the payment of the final 2017 dividend and foreign exchange losses as a result of a weakening of the Swedish krona relating to Chesnara’s Movestic business, which is based in Sweden.
Sales increase
The company said it has made good progress with the Scildon development programme, where there has been a 29% increase in the sales of term contracts compared to the first half of 2017.
Profit before tax fell to £26.5mln from £51.6mln in the same period of 2017, but last year’s profit figure was boosted by a £20.7mln profit on the acquisition of Scildon.
Earnings net of tax on an EcV basis declined to £13.6mln from £105.8mln, although once again the 2017 figure was inflated by a one-off gain (of £65.4mln) arising from the acquisition of Scildon.
"I am pleased to report that during the first half of 2018, a period in which equity markets remained broadly unchanged, we continued to generate more than sufficient cash to fund the dividend strategy,” said John Deane, the chief executive of Chesnara.
“The strong 2017 results were most welcome as they reflected the benefits that can arise from successful acquisitions and from positive market conditions, but it is equally important that the business, as in the first half of this year, can generate sufficient cash in the absence of acquisitions and without the assistance of economic tailwinds,” he added.
Shore Capital has published a positive note on Chesnara, whose H1 statement reads well. DPS +3%, cash generation £48.6m, solvency 157% 146%). Prospective yield 5.3%. https://t.co/3i6eD4lXjU
— Robin (@RobinGBoyle) August 30, 2018
The house broker, Shore Capital, said Chesnara’s results show the strength and cash generative nature of the core business.
Cash generation
“The proposed 3% increase in the interim dividend to 7.21p is evidence of management’s commitment to one of the most consistent dividend payments in the sector, in our view,” the broker said.
“The cash generation in the first half has been boosted by the release of capital held within the UK with profit funds (£26.8mln). While this could be described as one-off in nature we would argue that it is simply not always done annually,” Shore commented.
“The excess capital in the with-profits funds builds up over time and can be released by the company once approved by the regulator. This can be done annually if the company wishes and indeed we note that there is still another £6.6mln of surplus remaining unreleased as at the end of the period,” the broker added.
“We continue to believe that the c17% discount that the shares trade on relative to our unchanged 2018F EcV (468p) is much too great given the group’s track record of completing smart deals. Equally, the forward yield of 5.3% (vs our 2018F dividend of 20.67p) looks too high given the exemplary track record and focus of management on delivering consistent dividend growth. We would view a c5% forward yield as more appropriate, particularly as the Scildon acquisition is set to deliver further benefits through the integration process, in our view,” the house broker said.
Chesnara's First Half Profit Halves on Scildon Effects https://t.co/fg3BhlPGdM https://t.co/pWpQMZv9df - All You Need To Know About Insurance pic.twitter.com/HRLgGlHgRo
— InsureZero Blog (@InsureZeroBlog) August 30, 2018
Staying on an even keel - as usual
Speaking to Proactive Investors, Deane said the company has sufficient cash to provide “acquisition firepower and dividend firepower”.
“The group generated £48.6.2mln in the first half of the year but this was including a £28.6mln release of surplus from the UK with-profit fund and as we always say, you should not expect the full-year result to be double that of the first half," Deane said.
While cash generation received a boost, the performance of the Swedish business, Movestic, was hampered by the weak exchange rate.
Deane was sanguine about this, saying, “We don’t try to hedge against that because that would involve the use of shareholders’ funds”.
In the Netherlands, the rebranding of the business to Scildon - “a meaningless name but one I can pronounce,” quipped Deane – has gone well.
“When you change the name you always wonder whether it will have a negative impact,” Deane admitted, but the early signs are that the business has been rejuvenated even if it is not clocking up the levels of new business management would like.
“There is stuff we can do to improve that,” Deane assured Proactive, suggesting that greater use of information technology and a general improvement in processes should lead to efficiency gains.
“We’re a long-term player and a long-term cash generator,” Deane concluded.
Shares in Chesnara were off 7.5p at 382.5p in late afternoon trading
--- Adds management and broker comments; updates share price ---