Chesnara PLC's (LSE:LON:CSN) latest acquisition from Canada Life UK is small but 'highly attractive' according to analysts at Panmure Liberum.
The life and pensions group is acquiring £1.5bn assets under administration across 17,000 unit-linked policies for a total consideration of £2 million.
By focusing on unit-linked policies, Chesnara should see “an incredibly fast payback period and uplift to cash generation,” adds the broker, adding to its predictable cash generation, which ultimately supports the uninterrupted dividend growth trajectory.
“Moreover, this still leaves management with all the firepower to conduct a larger transaction next year should the opportunity present itself.”
“To this end, the new policy administration partnership bodes well for migrating policies at scale and generating further efficiencies over time.
One of Chesnara's best deals
Although not a large deal, Panmure Liberum suggests it is one of Chesnara’s most attractive on a purely financial metrics basis.
The discount to EcV [economic value] means an immediate uplift of £8 million via a reinsurance agreement, while the deal should generate £8 million of cash over five years.
More M&A is likely, adds Panmure, with Chesnara having a liquidity position of £200 million through ready cash and a revolving credit facility.
In addition, “assuming management keeps its debt leverage at around 30% of its IFRS capital base”, the broker suggests an acquisition with c£300 million of value could provide for an additional debt capacity of c£100 million.
“We get the sense management may be willing to participate in larger M&A than in the recent past, especially if traditional competitors and PE houses are focused elsewhere.
“Larger peers are trying to focus on organic new business opportunities, while private equity-backed players now have a higher regulatory hurdle.
Management has carried out due diligence on several possible transactions, adds Panmure Liberum, with a strong pipeline for the next 6-12 months for value-enhancing transactions.
Regulatory metrics are also strong with a Solvency II coverage ratio of 201% at 1H24 (FY23: 205%), compared to a target range of 140%-160%, which implies excess capital above the top end of the target range of £134 million.
“This was partly helped by a well-timed tier 2 debt issuance in 2022 and points to the M&A capacity management has on a standalone basis.”
More deals likely
Panmure adds that with £200 million of firepower “We expect management to acquire additional insurance portfolios”.
Now is a sensible time to be an acquirer as life insurers continue to battle inflation, legacy systems and operational challenges associated with run-off books, it adds.
“We also continue to expect a steady flow of new business, which has historically supported around one-third of the dividend cost.
“The move to the new outsourcing policy administration partner SS&C will allow for the migration of future acquisitions at scale and bodes well for efficiency improvements.”
In conclusion, Panmure says that Chesnara is underrated given trends currently in the life sector.
“With a well-timed Tier 2 debt issue and solid balance sheet, management is well positioned to take advantage of closed Life Insurance (NS:LIFI) consolidation.
“The Economic Value (EcV) is not immune to market volatility, but a clear vision and focus on value & dividend enhancing acquisitions and new business gives us confidence the EcV will continue to grow through the cycle.”
Big yielder
Currently, Panmure estimates the shares trade on a 23% discount to June’s EcV number of 337p, “Which fails to reflect the growth opportunities, outlook, and realistic value of the business”.
In addition, the estimated 2024 dividend yield is an attractive 9.6% and 'likely to continue to grow'.
'Buy' with a target price of 420p is its recommendation. Shares today were unchanged at 258p.
The formal transfer via the UK courts of the Canada Life portfolio is scheduled to take place at the end of 2025.