After an interval of 18 months, Chesnara Plc (LON:CSN) announced a new acquisition just before Christmas. Although relatively small, it is another positive step for the company. The deal is a further acquisition from Canada Life UK, this time a portfolio of unit-linked bonds and legacy pension business, consisting of ca.17,000 policies and £1.5bn of AUM. The portfolio will transfer into Chesnara’s UK business, Countrywide Assured. Expected completion is at the end of 2025, subject to the Part VII transfer getting court approval. Having previously purchased a Canada Life UK term assurance book, the integration should be straightforward.
- Structure: As with the previous deal, a retrospective reinsurance arrangement is being put in place. Chesnara will reinsure the portfolio from 31 December 2023 and, so, will get the full benefit in the FY’24 figures. The consideration is £2m, with an expected £8m Economic Value gain.
- Estimates: The terms of the deal are positive and have led to some upgrades to our figures. Our 2024E EPS, increases to 36.7p from 31.1p, and our 2025E EPS to 32.6p from 32.3p. We have also made small upgrades to our year-end Economic Value and cashflow figures.
- Valuation: With a price at approximately 70% of its forecast Economic Value, Chesnara seems undervalued. A prospective dividend yield of 9.7%, 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.
