- Efficiency savings expected to hit £225m by year-end
- Activist investor Cevian wants more aggressive cost-cutting
Underlying half-year results for Aviva (AV.) can have hardly excited the market, but that was largely forgotten as investors looked forward to a £4bn pay-out by the end of next year.
After going through a prolonged period of disposals, the interest now is in how the much slimmed-down insurer performs within the confines of a newly consolidated business. The unanswered question is whether a smaller Aviva is necessarily a more focused and profitable business than the lumbering and bloated entity that characterised its recent history.
The £4bn pay-out begins immediately with a £750m share buy-back and to finish in tranches by the end of 2022. Alongside shareholder capital returns, an efficiency drive is on course to provide £225m of cumulative savings by the end of this year.
Management had already signalled that proceeds from its disposals would be heading shareholders’ way, but the entry of an aggressive activist investor is likely to have galvanised events.
Stockholm-based Cevian Capital disclosed a 4.95 per cent position in Aviva earlier in June, making it one of the company’s three largest shareholders, and has reportedly asked for a board seat, along with a minimum of £500m in cost cuts, compared with the £300m that Aviva has already targeted.
Managing a potentially troublesome shareholder will be a challenge for Amanda Blanc, who is Aviva’s sixth permanent or acting CEO since the retirement of Richard Harvey in 2007. This is particularly true in that Cevian’s core argument - that Aviva has suffered from years of indifferent management and poor strategic decision-making - finds a sympathetic audience in the City.
Whether management can resist pressure for higher pay-outs than have already been announced will depend on how much excess capital the company retains after its disposals are fully completed. Analyst estimates range between £3.7bn and up to £6.6bn, which suggests Cevian could have the leverage it needs to demand a higher return of capital.
Meanwhile, the future of Aviva Investors, the asset management arm, is a prime example of unfinished business. It has long been cited as immaterial to the overall company’s fortunes – its main clients are other Aviva businesses – and calls for its sale will not go away, particularly after news that Dutch insurer NN group has put its equities asset management business under review after pressure from Elliot Partners.
Aviva shares trade on 9 times consensus forecasts for 2022. That looks good value and, if nothing else, it is nice to see the shares look interesting, rather than useless, for a change. Buy.
|ORD PRICE:||420p||MARKET VALUE:||£16.5bn|
|TOUCH:||420-420.3p||12-MONTH HIGH:||426p||LOW: 253p|
|DIVIDEND YIELD:||5.1%||PE RATIO:||10|
|NET ASSET VALUE:||463p*||SOLVENCY II RATIO:||203%|
|Half-year to 30 Jun||Net premiums (£bn)||Pre-tax profit (£m)||Earnings per share (p)||Dividend per share (p)|
|*Includes intangible assets of £1.76bn, or 45p a share|