Chesnara hampered by foreign exchange translations

Chesnara (CSN) had its issues with cash generation at the 2020 year-end, and they have persisted over the first half of 2021, albeit due to the vagaries of equity investment growth and foreign exchange translations, with the former subject to Solvency II capital requirements. Shareholders won’t be overly concerned given a 3 per cent increase in the interim dividend, forming part of “the 17th consecutive annual dividend increase”.

The group, a manager of life and pension books, registered new business profits of £6.6m through the half-year, down on the pre-pandemic level but stable nonetheless. The slight drop from the prior half-year was partly attributable to difficulties in the Netherlands market brought about by Covid-19 disruption, and we may not see a marked recovery until 2023.

At any rate, the new business wins translate to £12.7m of incremental future cash flows and covers 40 per cent of the reduction in the economic value linked to dividend payments, a chief feature of the investment case even with the short-term impact of equity market growth on Solvency II capital requirements. Going forward, the group is targeting a rate of 50 per cent of the cost of dividend payments. They amounted to £21.4m in the period under review, which, along with a foreign exchange loss of £24.2m, compares unfavourably with a gain of £36.7m in HY 2020.

Chesnara is in decent trim as we move through the third quarter, with a new £100m revolving credit facility in place and solid capitalisation providing optionality on the acquisitions front. Analysts at Panmure Gordon are looking to net cash generation of £34.5m in 2021, rising to £38m in the following year. Income buy.

Last IC view: Buy, 273p, 30 Mar 2021