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Phoenix reschedules its debt

BROKER TIP: The closed life assurer can now increase dividend payments as restrictive covenants are eased
February 14, 2013

■ Equity placing to raise £250m

■ £450m early debt repayments

■ Dividend restrictions eased

IC TIP: Buy at 629p

Phoenix Group Holdings (PHNX) has announced a plan to reduce debt levels, extend the maturity of a banking facility and boost the dividend payout. The package - which shareholders will vote on at a meeting on 19 February - involves a placing and open offer designed to raise £250m, which Phoenix will use together with existing resources to pay down £450m of debt, leaving the closed-life fund specialist with outstanding debt of £1.86bn.

Crucially, this will do away with certain covenant restraints on existing loans that place a cap on the pace of dividend growth. So, subject to shareholder approval and the group's trading performance, Phoenix expects to declare a final dividend of 26.7p per share for 2012, a rise of 27 per cent. Together with the interim dividend of 21p already paid, this would mean a payout of £125m, equivalent to a yield of 7.5 per cent, and a capacity to increase the payout by £10m a year thereafter.

The group is already highly cash generative, delivering £690m in 2012 and keeping the group on target to meet its objective of generating £3.3bn between 2011 and 2016. And Phoenix also has £1.2bn excess capital over the Insurance Group Directive minimum requirement.

 

Investec says…

Buy. Assuming the proposals are approved by shareholders, Phoenix offers an attractive income, which using our 27.9p a share forecast 2013 interim dividend, gives a forward yield of 8.7 per cent. And while the issue of extra shares will dilute earnings, our embedded value forecast of 1,026p for 2013 means that the shares are trading at a significant discount. Furthermore, the new shares are being offered at a 15.4 per cent discount to the 29 January closing price, which together with expected share price accretion offers shareholders a prospective total return for 2013 in the region of 17 per cent. Expect IFRS operating profits in 2012 of £417m, rising to £437m in 2013.

 

Berenberg Bank says…

Buy. Debt covenants restricting dividend payments to £72m, or 42p a share, no longer apply. Also, having better matched cash inflows with debt repayments, we believe that dividends will increase as leverage falls. Indeed, we have increased our 2013 dividend forecast by 27 per cent to 53.4p for a yield of around 8.5 per cent, with further increments expected after that. Accordingly, we believe that the deep discount on the shares to embedded value now looks unjustified, and we have revised our share price target to 700p.