The broker upgraded its recommendation to ‘hold’ from ‘reduce’, keeping its target price of 290p, which it said was “fair value”.
“Chesnara’s business model is flexible, but is unlikely to generate the same scope for scale benefits as some of its peers,” Peel Hunt said in a note to clients on Wednesday.
On the other side of the coin, analysts said that Chesnara is lower risk than some of its closed-life peers as its high exposure to unit linked funds under management is coupled with no major exposure to annuities, low leverage and a more flexible cost base.
“This means that fee income is the main source of cash generation and the key risk is equity and credit market volatility, with some mortality and lapse risk.”
The analysts said Chesnara’s economic value “will decline over time” as the closed life funds in the UK run off and it is “unlikely” to be offset by the international life funds as new business growth is currently lacklustre.
Peel Hunt predicts cash generation will see a “natural” decline below the 3% compound annual growth trend of the dividend from 2022, “so the dividend is sustainable until 2021” and dividends are assumed to be flat after 2023.
“In order to stabilise the trajectory of economic value and sustain the dividend policy, Chesnara would need to find new synergies in the funds it manages, increase the new business contribution in Sweden and the Netherlands or transact new deals,” the analysts said.
New deals could be in the pipeline, chief executive John Deane said recently, with the group's financial position providing scope to make more acquisitions.