Standard Life buoyed by Canadian disposal

Standard Life's (SL.) decision to sell its Canadian operation to local life assurer Manulife (CA: MFC) was certainly well received. The shares jumped 8 per cent on the day of the announcement, and it's hard to find a sector analyst who doesn't extol the virtues of the move.

That reaction is understandable. First, management seems to have negotiated an exceptionally canny deal. The price-tag is £2.2bn - £700m more than consensus valuation estimates for the business - of which £1.75bn (73p a share) will go straight to shareholders. The capital is being distributed through a scheme that allows investors to accept it as either income or capital (a 'B'/'C' share scheme).

Second, the deal allows Standard Life to exit a highly competitive business where sales have struggled. Crucially, the exit supports the group's strategic shift away from capital-intensive pure life business towards more dependable fee-focused lines, such as asset management. That strategy received a boost after the group completed the acquisition of fund manager Ignis in July.

The move will leave the company far more exposed to the UK life and savings market, which, as analysts at Berenberg point out, is "one of the most competitive marketplaces anywhere in the world". Yet Standard Life is also among the best-placed to compete. Its big presence in the drawdown and self-invested personal pensions (Sipps) markets, for example, leaves it poised to take advantage of the Budget day decision to scrap compulsory annuity purchases.

Panmure Gordon says...

Buy. The Canadian division includes a capital-intensive book of legacy business, the disposal of which will substantially reduce Standard Life's overall capital requirements. By refocusing the group on fee-based operations, this should create a less volatile profit stream. Moreover, Standard Life is getting a great price, and we view the deal as fabulous for shareholders. Yet the shares - trading on about 1.1 times our 2014 forecast for embedded value (371p a share) - are inexpensively rated for the sector. That discount sits awkwardly with the group's prospects in the UK: it is well-placed to take advantage of such developments as autoenrolment. Expect operating profit of £747m for 2014, with operating EPS of 25.2p.

Deustche Bank says...

Buy. Management says the combined impact of the sale and cash return will actually be earnings neutral. Yet it will boost the quality of the group's earnings, given the substantial shift towards fee income. In fact, we forecast that fee-based revenue will account for 94 per cent of the total by 2016, compared with 81 per cent in the first half of 2014. Excluding Canada, we also expect underlying revenue growth of 24 per cent a year between 2013 and 2016 - partly reflecting the Ignis acquisition - compared with 15 per cent previously. That prompts us to boost our sum-of-the parts-based valuation by 6 per cent to 455p a share. Expect adjusted EPS of 22.3p for 2014, rising to 26.2p in 2015.