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Phoenix beats cash targets

The closed book life assurer has been extracting value from its acquisitions
March 16, 2018

Phoenix (PHNX) shareholders were reassured, two weeks prior to the release of these full-year results, that the group had generated the cash necessary to increase the final dividend for 2017. However, following the announcement of plans to acquire Standard Life Aberdeen’s (SLA) assurance business, management has also issued a new long-term cash generation target of £2.5bn for the four years to 2022. A further £3.8bn is expected from 2023, not including any additions to its portfolio, so investors should be in line for further increases in the payout.

IC TIP: Buy at 785p

Completing the integration of 2016’s Axa Wealth and Abbey Life acquisitions boosted cash generation, which was up a third to £653m. That takes the total attributable to each unit since the completion of the deals to £282m and £236m, respectively. As a result, management expects the total count for 2017 and 2018 to be at the upper end of its £1bn-£1.2bn target. The integration also helped boost the solvency capital surplus to an impressive £1.8bn, up from £1bn in 2016.

The group extracts value from its acquisitions by undertaking ‘management actions’, which include rationalising back-office functions. Cost synergies last year came in at £27m, substantially ahead of the £10m anticipated. During the first quarter of this year, management plans to close Abbey Life’s Bournemouth office after switching all that businesses operations to its Wythall. It reckons this will generate annual pre-tax cost savings of £10m.       

Exclusive negotiations are also under way to carry out the group’s first external pensions bulk annuity transaction. Management says the market would provide a complementary source of annuity back books, projecting demand of around £550bn over the next 15 years as pension trustees seek to de-risk pensioner and deferred liabilities. The acquisition of SLA also brings with it a German business, giving Phoenix the opportunity to diversify into the less mature European closed book market.

Following the announcement of the SLA acquisition, analysts at JPMorgan expect adjusted net assets of 438.4p a share at 31 December 2018.

     
PHOENIX GROUP HOLDINGS (PHNX)  
ORD PRICE:785pMARKET VALUE:£3.09bn
TOUCH:785-786p12-MONTH HIGH:820pLOW: 719p
DIVIDEND YIELD:6.4%PE RATIO:NA
NET ASSET VALUE:802pSOLVENCY II RATIO:164%
Year to 31 DecGross premiums (£bn)Pre-tax profit (£m)Earnings per share (p)*Dividend per share (p)*
20131.3324175.647.5
20140.9846586.247.5
20150.9015276.147.5
20160.99-70-34.347.6
20171.13-7-7.050.2
% change+14--+5
Ex-div:22 Mar   
Payment:4 May   
*Adjusted for 7:12 rights issue, except for final 2016 and 2017 annual dividends