■ UK business growing strongly
■ International side remains weak
■ Restructuring costs set to rise
Resolution (RSL) remains on target to achieve its objectives - set out in a root-and-branch restructuring plan - that include shifting management of the life assurer from an offshore operating company to a conventional UK board of directors.
Cost-reduction targets have been raised from £143m a year ago to £160m by end-2015, with over three-quarters of this already achieved. However, integrating its AXA IT system is expected to cost £35m more than expected, while a review of other IT systems will mean additional costs "in the low tens of millions". Additionally, the group's outsourcing programme will cost an extra £30m. However, group finances are in good shape, with the Friends Life operating arm maintaining a £1.9bn surplus over its regulatory minimum requirement, while a $575m (£363m) note issue helped boost shareholders' funds to £621m.
On the trading front, the value of new business rose in the first nine months from £95m to £138m, while new business strain - the upfront costs of writing new business - fell from £239m to £172m. Trading outside the UK remained weak, however, and Friends Provident International is expected to focus on growth markets such as Singapore and Hong Kong and wind down non-core operations, starting with the sale of its 30 per cent stake in joint venture AmLife Takaful Berhad.
Bank of America Merrill Lynch says...
Buy. New business volumes as measured on an annual premium equivalent (APE) basis were up from £547m to £598m in the UK, and while the international side saw new business volumes down from £333m to £272m, it is this side of the business that Resolution is working to set right. Crucially, the group has confirmed that none of the increase in restructuring costs will affect the dividend payout and we believe this is the principal reason for owning the shares. Trading on eight times 2014's forecast earnings, we have a price target of 264p - based on a sum-of-the-parts valuation.
Investec Securities says...
Sell. Resolution missed consensus targets for new business values and also announced increased integration costs. Furthermore, there was no additional news on the group's corporate restructuring and, given the lack of transparency, we are retaining our sell advice. New business values jumped sharply in the UK, but the Lombard and international businesses are still facing problems, with new business values down 48 per cent and 25 per cent, respectively. Expect operating profits for end-December 2012 of £712.5m, EPS of 34.3p, a dividend of 21.1p and embedded value of 419.5p.
