Legal & General Group Plc – Maintaining business resilience

Legal & General Group PLC (LON: LGEN) is a FTSE 100 listed Company, which provides financial services across the UK, and the US. The Group has more than £1 trillion of assets under management.

On 10 March 2021, the Company will announce the 2020 full-year results.

Rationale for Valuation – Buy at GBX 205.20

• Over the longer-term, the Company expects to maintain the progressive dividend policy, reflecting the LGEN’s expected underlying business growth.
• Over the next five years, the Group intends to write £40 to £50 billion of UK pension de-risking business.
• It has a proven operating model and a robust balance sheet with a substantial risk management process and surplus regulatory capital.
• It has maintained an investment ratio above 200% for the last five years, which also underpinned by continuous growth in the UK and overseas business.

Key Risks

• In H1 FY20, the profit was down, due to the unrealised impact of market movements and the formulaic impact of lower interest rates on LGI (Legal & General Insurance).
• Investment market performance and conditions in the broader economy may adversely impact earnings, profitability or surplus capital.
• Further, a major sovereign debt event and the systemic corporate sector failures could impact the value of bond portfolios.

Recent News

On 4 September 2020, the Company announced the launch of ‘Institutional Insights’, which is a fortnightly podcast series giving an insight into the LGRI (Legal & General Retirement Institutional) global division and covering a range of PRT (Pension Risk Transfer) topics.

On 18 August 2020, the LGA (Legal & General America) has been certified as a Great Place to Work™ five years in a row by Great Place to Work U.S.

Financial Highlights (for the six months period to 30 June 2020, as on 5 August 2020)

(Source: Company Website)

• The Company has shown a robust balance sheet, resilient operating profits and highly relevant products and services, with H1 FY20 solvency ratio of 173% and unutilised credit default reserve of £3.5 billion.
• The Board of the Group has declared an interim dividend per share of 4.93 pence, in line with the previous year, in order to maintain flexibility as the economic effect of coronavirus becomes clearer.
• For H1 FY20, the operating profit from continuing division decreased to £1,128 million (H1 FY19: £1,154 million), with 3 of 5 businesses delivering growth.
• In LGR (Legal & General Retirement), the operating profit increased by 10% year-on-year to £721 million, driven by the consistent performance of the growing annuity portfolio.

One Year Share Price Chart

1-Year Chart as of 7 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Technical Analysis

From the technical standpoint, 14-day RSI is supporting the upside movement, which also means there is a good potential for a short term rebound in the stock price.

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

Overall, the Company is operating with a robust balance sheet, resilient operating profits, and highly relevant products and services. It expects LGRR (Legal & General Retirement Retail) target market to continue to expand, due to welfare reforms and ageing demographics. Further, LGI (Legal & General Insurance) expects to emerge stronger from the current COVID-19 crisis. LGIM (Legal & General Investment Management) is well-positioned to continue to drive net flows and to deliver earnings growth, as it continues to expand internationally.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Legal & General Group at the current market price of GBX 205.20 (as on 7 September 2020, before the market close at 9:14 AM GMT+1), with lower double-digit upside potential based on 1.40x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

Standard Life Aberdeen Plc - Delivered a strong capital position.

Standard Life Aberdeen Plc (LON: SLA) is an Investment Management Company, which is listed on FTSE 100 index. The Company is headquartered in Scotland and provides a broad range of assets management services in over 50 countries.

Rationale for Valuation – Buy at GBX 226.60

• The Company has maintained an interim dividend of 7.30 pence per share in the last three years.
• Acquisition of SL Asia completed on 30 June 2020, which creates a stronger insurance business with licences to serve Hong Kong and Mainland China.
• The debt to equity recorded by the Company in the past three years was considerably below the peer’s average, which shows that that the Company is less leveraged as compared to the peers.

Key Risks

• The ongoing market volatility arising from geopolitical and economic uncertainties can dampen investor sentiments.
• The Covid-19 pandemic and wider economic downturn have been impacting the portfolio value of assets.
• The subdued M&A activity in the core sectors can reduce the investor appetite for the Company’s assets.

Recent News

On 1 September 2020, Stephen Bird has taken up the role of Chief Executive.

Financial Highlights (for the six months ended 30 June 2020, as on 7 August 2020)

(Source: Company Website)

• The Company has shown a robust investment performance. As on 30 June 2020, the Company had assets under management and administration (AUMA) of £511.8 billion with 68% of the assets outperformed the index over three years.
• It reported improved gross inflow of £38.2 billion in H1 FY20 with a net inflow of £0.1 billion excluding Lloyds banking group (LBG) withdrawal.
• SLA declared the interim dividend of 7.3 pence per share that would be paid in September 2020.
• As of 30 June 2020, it had a strong capital position and balance sheet, with the liquidity of £2.8 billion and a regulatory capital surplus of £1.8 billion.
• It is focused on completing share buyback of £400 million in H2 FY20.

One Year Share Price Chart

1-Year Chart as of 7 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Technical Analysis

From the technical standpoint, 14-day RSI is supporting the upside movement, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

The Company highlighted that the current economic situation is challenging, but it also provided a few opportunities to grow. The transformation programme stays on track, and it is projected to deliver cost synergies of £350 million by the end of 2020 and £50 million in 2021. Further, market recovery would support the Group's position as an active asset manager. Overall, SLA is confident about the liquidity position to pay the dividend and complete the share buyback.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Standard Life Aberdeen at the current market price of GBX 226.60 (as on 7 September 2020, before the market close at 8:16 AM GMT+1), with lower double-digit upside potential based on 1.0x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

*All forecasted figures and Industry/Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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