Chesnara back on the M&A trail

Shareholders in Chesnara (CSN) are in for another dividend increase, as the life and pension consolidator extended its run on this score to 18 years. Mechanisms are in place to ensure that the company doesn’t overstretch to meet payments, but commercial cash generation more than doubled to £46.6mn through the year, representing dividend coverage equivalent to 133 per cent.

Income prospects weren’t dampened by volatile market conditions, although with both risk assets and debt securities in decline, it was no surprise that economic value fell to £512mn from £624mn, a partial reflection of the widening of credit spreads.

M&A was on the agenda throughout the year, with deals completed for Sanlam Life & Pensions and Robein Leven, along with the acquisition of Conservatrix's insurance portfolio post period-end. Activity in this area was driven along by the issue of £200mn of Tier 2 subordinated debt in February 2022, which provides “significant headroom for future M&A activity”, according to chief executive Steve Murray.

Chesnara reported a Solvency II ratio of 197 per cent, materially above its normal operating range of between 140-160 per cent and the 152 per cent seen a year earlier.

Volatility in equity markets and bond prices is likely to persist through the current year, but the fall in economic value doesn’t reflect the performance of the underlying business. And the structural drivers of the business are still in place; specifically, the ongoing refocus and transformation strategies playing out among the big international insurers.

With the shares trading at 13-times forecast earnings and at a 25 per cent discount to the consensus target price, we maintain our positive stance. Buy.

Last IC view: Buy, 305p, 31 Aug 2022