After a longer wait than planned, Chesnara Plc (LON:CSN) has announced a large acquisition, HSBC Life (UK). At a cost of £260m, it is over 70% of Chesnara’s pre-announcement market capitalisation and will be funded by a mixture of equity, existing cash resources (primarily from the earlier Tier 2 bond issue) and drawing down from a newly increased revolving credit facility. The rights issue should complete by 23 July 2025, with deal completion in early 2026. There is a one-off additional uplift to the dividend per share (adjusted for the rights issue) of 6%, which will apply to the 2025 final and 2026 interim dividends.
- Rights issue: The rights issue is 10 shares for every 19 existing shares with an execution price of 176p. This is a 40% discount to Chesnara’s pre-announcement share price and a 30% discount to the theoretical ex-rights price. The 79.6m new shares increase total shares by 53%.
- Estimates: With the rights issue taking place immediately but the deal not completing until early 2026, the 2025 per-share figures do not reflect the economics. 2026 EPS will more than double, boosted by the acquisition gain. We still estimate the deal should be accretive on an underlying basis in 2026.
- Valuation: With a price at ca.70% of its forecast Economic Value, Chesnara seems undervalued. A prospective dividend yield of above 8%, with good prospects of continued growth, also suggests an undervalued stock, 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 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.
