Overview
 (PHNX) is a London, United Kingdom-headquartered largest specialist life and pensions consolidator of heritage life assurance funds in Europe. The company specialises in the Heritage business, which focuses on closed life fund consolidation. The group has a strategic partnership with Standard Life Aberdeen wherein the company operates an open business which underwrites and manufactures new products and policies. The company’s origin in the insurance world can be traced back to 1782, and the group was listed on the London Stock Exchange in 2010. It has operations in the United Kingdom, Ireland and Germany, with £226 billion of assets under administration, serving 10 million policyholders. The group is a constituent of the FTSE 100 index.

Phoenix continues to be a predominantly Heritage business where the group specialises in the management and acquisition of pension and closed life insurance funds. But now it has a substantial Open business element which is underpinned by a strategic partnership with Standard Life Aberdeen plc. The company has five operating life companies which hold client assets and distribution business, SunLife - which offers a wide range of financial products especially for the over 50s segment. With an estimated market size of £540 billion across the UK, Germany and Ireland, the group seeks to be Europe’s Leading Life Consolidator in this market which is bifurcating between capital heavy insurance specialists and capital light firms who will concentrate on sales and distribution.

Key Statistics

Management
Nicholas Lyons is the Chairman of the Board of the company. He has a diverse and extensive experience of holding several positions on the boards of other financial institutions. Clive C R Bannister was appointed as the Chief Executive Officer in February 2011.

Segments
The company's operations are differentiated in three operating segments: UK Heritage, UK Open and Europe. UK Heritage comprises a wide range of pensions and life products which provides the company with natural diversification and new business is generated through vesting annuities and bulk purchase annuities. UK Open includes products that are actively sold to customers and mainly relates to those products being sold under the Standard Life brand. Europe includes both heritage and open products split across Ireland and Germany and provides a platform for potential future acquisition.

Top Shareholders
 
(Source: Thomson Reuters)

Key Financial Highlights (FY 2018, in £m)
 
(Source: Company Filings)

With total cash generation of £664 million in 2018, the company delivered cash generation worth £1.3 billion in 2017 and 2018, helping it to exceed the upper end of the target range. For 2019, the company expects to generate £600 – £700 million of cash, with a long-term target for 2019 – 2023 of £3.8 billion. The company reported operating profit across all three business segments for the first time, delivering a total operating profit before tax of £708 million. The increase in operating profit was mainly due to the acquisition of Standard Life. The Solvency II surplus increased to £3.2 billion as at 31 December 2018 from 2.5 billion as at 31 December 2017, indicating strengthened resilience of its capital position. The Shareholder Capital coverage ratio of 167% at 31 December 2018 was well within the group's target range of 140% to 180% and rose from a 147% pro forma ratio at 31 December 2017. Due to adverse market movements experienced in the fourth quarter of 2018, assets under administration, as at 31 December 2018, reduced from £240 billion at 31 December 2017 to £226 billion. The company recommended an increase of 3.5% in the final dividend to 23.4p per share, resulting in an annualised dividend of 46.8p per share. The Phoenix Group revised its total synergy target from the acquisition of SLA businesses to £1,220 million, increased by £500 million from £720 million.

Financial Ratios

(Source: Thomson Reuters)

Ratios Commentary
The year 2018 was a very successful year for the company, which was evident from the improvement in the financial ratios. Favourable performance and the acceleration in the premiums earned can be attributed to the acquisition of Standard Life Assurance businesses (acquisition completed on 31st August 2018). Earning power, though below industry median, also improved considerably. The leverage position was also better than the last year.

Valuation Methodology
Method 1:Price/Book Value Approach (NTM)
 
To compare PHNX with its peers, P/B multiple has been used. The peers are Just Group PLC(NTM P/B was 0.35), Standard Life Aberdeen PLC(NTM P/B was 0.97),RSA Insurance Group PLC(NTM P/B was 1.45) and Prudential PLC(NTM P/B was 2.14). The mean of P/B (NTM) of the company’s peers was 1.23x (approx.).

Method 2: EV/Sales Multiple Approach (NTM)

To compare PHNX with its peers, EV/Sales multiple has been used. The peers are Just Group PLC(NTM EV/Sales was 0.48), Prudential PLC(NTM EV/Sales was 0.94),Hastings Group Holdings PLC(NTM EV/Sales was 1.61) and Standard Life Aberdeen PLC(NTM EV/Sales was 4.19). The mean of EV/Sales (NTM) of the company’s peers was 1.81x (approx.).

*All forecasted figures and Peer information have been taken from Thomson Reuters.

Share Price Commentary

Daily Chart as at May-13-19, before the market closed (Source: Thomson Reuters)

On May 13, 2019, at the time of writing (before the market closed, at 12:45 pm GMT), PHNX shares were trading at GBX 674.7, down by 0.45 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 735.50/GBX 536.72. At the time of writing, the share was trading 8.36 per cent lower than the 52w High and 25.7 per cent higher than the 52w low level. Stock's average traded volume for 5 days was 1,183,677.20; 30 days - 1,182,888.10 and 90 days – 1,334,072.42. The average traded volume for 5 days was flat as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 11.8x compared to the industry median of 13.4x. The company's stock beta was 0.79, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £4.89 billion with a dividend yield of 6.79 per cent.

Risks Assessment and Growth Prospects
Though the Strategic Partnership with Standard Life Assurance plc will provide additional growth opportunities to the company, there is a risk that the intended benefits do materialise, leading to reputational damage for the group and financial losses. The company’s operations or financial position might be affected by changes in legislation such as the implications of Brexit. The industry in which the company operates could be affected by political uncertainty. Market turbulence risks impacting the emerging cash flows of the group, fees earned on assets held and on customers and client sentiment. Though the company's hedging programme brings resilience to its cash generation and solvency position, the market is expected to remain turbulent leading up to and beyond Brexit. However, considerable investment in capital-light new business capabilities have brought improved sustainability to its long-term cash generation and will provide additional growth opportunities. The group delivered strong financial performance during the year, and the acquisition of the Standard Life Assurance businesses was transformational for the company. Using new technologies and innovative ways, the company is seeking to improve the performance of funds. Through internal fund mergers and other operational improvements, which the company can now undertake because of its size, it can maximise economies of scale and capital efficiencies.

Conclusion
Europe’s largest life and pensions consolidatoris in a great position to capitalise on future growth opportunities and its sustainability to generate future free cash flow also been improved drastically. Based on the strong prospects and supported by valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 677.80 (as on 10^th May 2019) with high single-digit upside potential based on 1.23x NTM Price/Book Value (approx.) on FY19E book value per share (approx.) and 1.81x NTM EV/Sales Value (approx.) on FY19E sales (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on May-13-19)

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