Phoenix Group Holdings Plc (LON: PHNX)

Phoenix Group Holdings PLC (LON: PHNX) is an FTSE 100 listed and United Kingdom-based company, the largest life and pensions consolidator in Europe. It specialises in the management and acquisition of Heritage life insurance and pension funds. It operates through three main segments, namely UK Heritage, UK Open and Europe. The UK Heritage business comprises products that are built through the consolidation of over 100 legacy insurance brands, and they are no longer actively marketed. The Open business underwrites long-term savings and retirement products, and these products are actively marketed to existing and new customers. The Company also has a brand called SunLife, which sells a wide range of financial products.

On 11 August 2021, PHNX would publish its H1 FY2021 results.

Recent trend of dividend payments

(Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent dividend payment done by PHNX from FY2017 to FY2020. The last dividend of FY2020, GBX 24.10 per share, was paid on 18 May 2021 (final dividend). It had an ex-dividend date of 1 April 2021. 

The current dividend yield of PHNX at about 6.80% remains significantly above the UK 10-year bond yield at about 0.5695%. It is also higher than the dividend yield of the life insurance sector at about 2.90%.

The next dividend would be declared on 5 August 2021. It would have an ex-dividend date of 12 August 2021 and a payment date of 3 September 2021. 

UK Life Insurance sector outlook 2021

Fitch has maintained a stable outlook for the UK life insurance sector due to insurance companies’ solid operating profitability, strong business profile and solid capitalisation. However, Fitch expects pressure on earnings from low-interest rates.

Growth Prospects

• Investment in higher-return growth opportunities: The Company plans to sell Ark Life Assurance Company for a total cash consideration of £197 million. It would invest this capital into higher return growth opportunities, which could drive its future growth.
• Recent acquisitions: In FY2020, the Company completed the acquisition of ReAssure. Subsequently, it became the UK's largest long-term savings and retirement business. Also, its acquisition of the Standard Life brand could accelerate its Open business growth.
• Upgraded Fitch rating: Recently, Fitch Ratings has upgraded PHNX’s ratings to ‘AA-‘from ‘A+’. It reflects PHNX’s resilient capitalisation and enhanced debt service capabilities. It also points to PHNX’s strong earnings and solid business profile.
• Sustainability goal: The Company strives to reduce Scope 1 and Scope 2 greenhouse gas emissions by 20% in FY2021. It also set a target to have 100% renewable energy contracts in all the offices by FY2021. Furthermore, it wants to have net-zero carbon across its operations by FY2025 and its investment portfolio by FY2050. These initiatives could enhance the Company’s reputation significantly.
• Investment in customer proposition: The Company continuously invests in customer and digital propositions and has made significant progress there. There are enhanced client analytic tools and customer dashboards. It helps in delivering excellent customer service.

   (Source: Refinitiv, Research done by Kalkine Group)

  (Source: LSE, chart created by Kalkine Group, as of 28 July 2021)

Key Risks 

• Failure to obtain desired synergies in acquisitions: If the acquisitions made by the Company do not yield desired levels of synergy, then there could impact on both revenue and cost of the Company, impacting its margins.
• Failure to invest in growth opportunities: The Company may not be able to invest its capital into higher return growth opportunities due to improper assessment of the opportunity and some unexpected outcomes.
• Evolving needs of customers: Any failure to deliver propositions that meet the evolving needs of customers could result in a loss of market share for the Company.
• Regulatory changes: The Company could be impacted by substantial changes in the regulatory environment as these may affect their ability to serve their customers fairly.
• Adverse market movements: Any adverse market movement could result in negative impacts on PHNX’s capital, solvency and liquidity positions as well as fees on assets held. These, in turn, could affect the future cash flows to the Company.
  

Now we will analyse some key fundamental and shareholders statistics of Phoenix Group Holdings Plc.

Recent Development 

Sale of Ark Life Assurance Company: On 13 July 2021, the Company announced that it would sell Ark Life Assurance Company to Irish Life Group Limited. The deal would be worth £197 million. The Company wants to generate cash from this deal and reinvest it into higher return growth opportunities. 

Financial and Operational Highlight (for the year ended 31 December 2020, as of 8 March 2021)

(Source: LSE Website)

• The Company in FY2020 completed the acquisition of ReAssure. It became the UK's largest long-term savings and retirement business.
• PHNX has a resilient Solvency II balance sheet with a £0.9 billion surge in surplus in FY2020. Furthermore, its shareholder capital coverage ratio of 164% meets the target.
• The Company generated record cash of £1.7 billion in FY2020, which exceeds the target and is significantly higher than the FY2019 cash of £707 million.
• The Company maintained a sustainable and stable dividend policy, with a final dividend of GBX 24.10 per share, up 3% on the FY2020 interim dividend of GBX 23.40 per share.
• The Company continued to deliver on strategic priorities with increased customer satisfaction and investment in customer and digital propositions.
• By FY2021, the Company strives to achieve 100% renewable energy contracts across all offices. Furthermore, it wants to have net-zero carbon commitment in its operations by FY2025.

Share Price Performance Analysis

  (Source: Refinitiv, Research done by Kalkine Group)

On 30 July 2021, at 7:30 AM GMT, PHNX’s shares were trading at GBX 673.80, down by 0.77% against the previous day closing price. Stock 52-week High and Low were GBX 824.40 and GBX 649.20, respectively.

On a daily chart, the momentum indicator RSI (14-period) is trading at ~41.91 level and moving towards the oversold zone. The stock price is sustaining between the middle and lower Bollinger bands. Hence, there could be an uptick in the stock price in the near term.

In the last five years, PHNX’s stock has delivered a positive return of ~10.63%. Also, it has outperformed the FTSE 100 index with a return of about 5.26%. 

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

The Company delivered a resilient performance in FY2020, with record cash generation. In FY2021, the management wants to focus on its Open business growth strategy, more engagement with a large existing customer base and acquisition of new customers.  It also strives to maintain its sustainability commitments while trying to achieve its goals. The Company could benefit from its investment in higher-return growth opportunities, recent acquisitions, its enhanced debt service capabilities, its sustainability goal and investment in customer proposition for FY2021 and beyond. The management believes that the Company is well-positioned to leverage the key industry drivers of growth.

Considering the Company’s solid growth opportunity, its strong financials, its investment in customer propositions, its enhanced debt service capabilities, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Phoenix Group Holdings Plc at the current price of GBX 673.80 (as on 30 July 2021 at 7:30 AM GMT), with lower-double digit upside potential based on 9.58x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from Refinitiv.

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