Chesnara plc (LON:CSN) has announced its fourth acquisition in the past two years with the purchase of a book of variable annuity policies from MetLife UK. This adds 18,000 policies and £1.7bn of AuA, pushing the pro forma total to over £24bn. The expected lifetime cashflow is ca.£90m, of which approximately half is expected to be released over the first five years after completion. There is no significant consideration payable, which helps with a meaningful benefit to both SII Own Funds and the Contractual Service margin; both of which increase by ca.£45m on a post-tax basis, with a broadly neutral impact on the Solvency II ratio.
- Further news: Chesnara confirmed that the integration of Chesnara Life UK (formerly HSBC Life UK) is on target for completion around the end of the year. Similarly, completion of the Scottish Widows Europe acquisition should also take place around the end of the year.
- Estimates: Completion should take place in 2Q’27, so only our 2027 estimates are changed by the deal. Our OCG estimate for FY’27 increases by 7% to £120.6m, including some one-off transaction benefits. The FY’27E net SII Own Funds per share increases from 332p to 355p.
- Valuation: With a price at 1.1x of its forecast net SII Own Funds, Chesnara is trading a little above its asset value. However, a prospective dividend yield of 6.5%, with good prospects of continued growth, will be attractive to many investors, in our view.
- Risks: Ultimately, the company remains tied to movements in financial markets and adverse developments in operational areas. Making a large acquisition also brings some execution risk, but Chesnara has good experience in managing smaller deals successfully.
- Investment summary: Chesnara has three pillars for delivering value, under a responsible risk-based management. A close analysis reveals that Chesnara is making good progress in delivering these pillars. In our opinion, the yield appears high for a dividend that is both secure and growing.
