AV/ – Interims, Buyback
PCA – CFO to depart in October
AV/ – Interims, Buyback
Aviva released its half-year results on Thursday. The company has been very busy on the corporate development front, agreeing to the disposal of eight of its international businesses for £7.5bn as it refocuses on its core markets of the UK, Ireland and Canada. By the end of H1 2021 £1.9bn of the proceeds had been received. The main interest that the market has in AV/ at this time is what it intends to do with this money. The Group pared its debt by £1.9bn during H1, with a further £1bn of debt paydown signposted, all of which will cut cash interest costs by £170m per annum (at first blush this seems ambitious, but the maturing £500m of T2 capital in 2022 has a coupon of 8.25%, while the ‘Restricted Tier 1’ securities (£502m outstanding) maturing next year have a coupon of 6.125%). £4bn will be returned to shareholders by the end of H1 2022, £750m of which will take the form of a share buyback which has commenced immediately. Management hints at further buybacks, saying in the deck that it has a “preference for reduction in share count” (which makes sense, given the drag on earnings from disposals, part-offset by debt retirements).
In terms of its underlying performance, AV/ reduced ‘controllable costs’ by 2% (this is on the continuing operations), which combined with positive top-line momentum to deliver a 17% uplift in operating profit in H1. Management says the Group is “on track to meet our financial targets and commitments” and, in a sign of confidence in the outlook, it has upped the interim (ordinary) dividend by 5% to 7.35p. More than £225m of the targeted £300m in annual costs reduction will be delivered this year, with the balance to come in 2022. During H1 the Group reduced its portfolio of GI products by 10% and cut IT applications by 7%. The Group has increased digitisation across product areas, including claims, while it is paring its office footprint (which will deliver c.£20m of annual cost savings).
In terms of the investment view, it is hard to strip out an underlying performance measure given the usual noise in an insurance company’s accounts. Refinitiv gives consensus EPS of 51.75p for 2021 and 46.95p in 2022. Operating EPS (AV/’s own measure) was 21.0p in H1 2021. Annualising that suggests that AV/ should deliver at least 42p of earnings per annum from here (this is likely a conservative estimate) which puts it on ~10x earnings based on tonight’s closing price of £4.27. So, buying back stock at a 10% earnings yield makes heaps of sense, with the accretion cemented by the fact that the shares trade below both the Solvency II NAV (£4.33) and the IFRS NAV (£4.57). The £750m buyback will (off tonight’s price) reduce the share count by 175m shares / c.4.5%, with obvious implications for future EPS growth. As I see it, buying a well-capitalised insurer with strong market positions and strong asset value (for example, of its £7.3bn commercial mortgage book, only £5m is in arrears, while the bond portfolio is unsurprisingly skewed towards high rated securities) for 10x earnings, a glide path to earnings growth (falling share count, cost reduction, interest savings, digitisation and market growth underpinned by demographics and savings trends) and an ordinary dividend yield of 3.3% (with distributions set to be augmented by buybacks and – presumably – a special dividend) is a no-brainer. Hence, I am long AV/
PCA – CFO to depart in October
Palace Capital announced on Friday that its CFO, Stephen Silvester, will step down from the Board on 29 October 2021. An internal candidate has been appointed FD designate and PCA says that “the board is in the process of reviewing the Group’s cost base and will provide a further update on the appointment of a permanent successor in due course”. Silvester is a sagacious and genial chap who was always very open and helpful to retail investors, while he played a key role in PCA’s development. News of his imminent departure follows last month’s announcement that the Chairman (Stanley Davis) will retire (coincidentally, also on 29 October). It will be interesting to see if leadership renewal will have any real impact on PCA, where to me the strategy (recycling capital from non-core areas into accretive industrial and office opportunities in attractive regional markets, while pursuing cost efficiencies) is clear (and coherent).
Theodosian Capital 