Aviva PLC – Operating with a Robust Financial Position to Tackle the Short-Run Disruption

Aviva PLC (LON: AV.) is a FTSE 100 listed insurance group with global operations. Besides insurance, it also serves with savings and retirement business. It caters around 33.4 million customers, with approximately 31,000 employees. As of financial year, 2019, the Group had around GBP 510 billion assets under management.

On 26^th May 2020, The Aviva PLC will hold its annual general meeting.

Recent News
4^th May 2020:The Group’s prospectus for £7,000,000,000 Euro Note has been approved by the Financial Conduct Authority.

Update on Covid-19 and Final Dividend 2019
As on 8^th April 2019, the Board of Aviva agreed to withdraw the final dividend for FY2019 in the wake of the Covid-19 disruption and will reconsider the dividend in the fourth quarter of 2020. By retaining the dividend, the Group has boosted its liquidity position and thus estimated group capital ratio will surge by 7 per cent to nearly 182 per cent as of 13^th March 2020. Further, the Group was reviewing its plans for capital expenditure and all material discretionary spend. The Company had launched several initiatives to support employees, customers and Britain’s economy and was not intending to adopt the UK Government funded scheme to furlough employees.

Share Price Performance

Daily Chart as on 5^th May 2020, before the market closed (Source: Refinitiv, Thomson Reuters)

Aviva’s shares were trading at GBX 234.9 on 5^th May 2020 (before the market close at 1.14 PM GMT+1), up by 2.62 per cent against the last day closing price. Stock's 52 weeks High is GBX 439.40 and Low is GBX 205.70.

From the technical standpoint, 3 days, 9 days and 14 days relative strength index of the stock was favourable, and the price could rise further from the current trading level.

Valuation Methodology

 
Conclusion
During the financial year 2019, the Group reported a 14.3 per cent increase in its Solvency II return on equity as compared to FY2018 (12.5 per cent). Moreover, at the end of FY19, the fund generation stood at £2.3 billion. The operating profit was also surged by 6 per cent. Despite the headwinds through weak macro trends, the Group had a decent financial performance.  The Group is certainly facing disruption through Covid-19 in the short-run; however, it has a robust financial position and strong fundamentals to weather the uncertainties. Moreover, the Group made several changes in its organization structure and leadership to enhance operational efficiency and greater accountability.

However, as per the last update, the Group was not able to quantify the impact of Covid-19 on claim expenses in its general and life insurance business and hence, adopted measures to control capital expenditures and operating expenses. In the long run, the Group is well-positioned to meet future opportunities.

Based on the decent prospects, which are supported by valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 228.90 (as on 4th May 2020) with lower double-digit upside potential based 0.60x NTM Price/Book (approx.) on FY20E book value per share (approx.).
 
Provident Financial PLC – Resilient performance under the challenging scenario with its leading position in the large markets.

Provident Financial PLC (LON: PFG) is FTSE-250 listed company, which is operating as a specialist lender and serves around 2.3 million customers with around 4,865 employees. Its operations consist of Moneybarn, Vanquis Bank and Consumer Credit Division.

Recent News
On 20^th April 2020, the Group adjourned the annual general meeting due to social distancing, which is now scheduled on 7^th May 2020.

Covid-19 and Dividend Update
As on 27^th March 2020, the Group released an update regarding unprecedented uncertainty of Covid-19. Considering the health of stakeholders as the utmost priority, the Group is encouraging customer payments through the internet, while maintaining employees and customers contact over the telephone. Even prior to the Government regulations, 25 per cent of the weekly collections were made through non-cash methods. In the initial 11 weeks on FY20, the Group did not face any material impact on credit issued, collection and quality; however, the management was expecting the performance to be expected in future and thus, withdrawn any guidance for FY20. Further, the group decided not to propose the final dividend for FY19, which would save around £40 million in cash. Moreover, the Group held substantial capital and liquidity position with £200 million in capital headroom and nearly £230 million in liquidity through surplus cash and committed facilities.

Share Price Performance

Daily Chart as on 5^th May 2020, before the market closed (Source: Refinitiv, Thomson Reuters)

PFG’ shares were trading at GBX 172.3 on 5^th May 2020 (before the market close at 12.09 PM GMT+1), up by 0.12 per cent against the last day closing price. Stock's 52 weeks High is GBX 543.71 and Low is GBX 126.87.

Valuation Methodology


Valuation Metrics
 
(Source: LSE)

As on 31st March 2020, Price/Earnings multiple of the PFG Group was 6.5x, which was lower as compared with the Financial Services industry at 13.1x. Hence, it is reflecting that the company is trading at a lower multiple as compared to its peers.

Conclusion
During the financial year 2019, the Group had a resilient performance despite the regulatory headwinds. The Company is likely to get affected by the prevailing economic and geopolitical risk uncertainties in the short run. However, the Group has adopted measures to reduce discretionary spend and slashed dividend for 2019. However, the management is confident about the medium-term opportunity with the immediate actions adopted to preserve liquidity and maintain strong capital to weather the short-term uncertainties presented by Covid-19. Moreover, the Group is operating as one of the biggest providers of consumer finance and have sizeable opportunity to grow customers and market share further.

Based on the decent prospects, which are supported by valuation done using the above method, we have given a “BUY” recommendation at the current price of GBX 170.19 (as on 5th May 2020, before the market close at 11.22 AM GMT+1) with lower double-digit upside potential based 0.71x NTM Price/Book (approx.) on FY20E book value per share (approx.).
 
*All forecasted figures and Peers information has been taken from Refinitiv, Thomson Reuters.
*The “Buy” recommendation is also valid for the current price as covered in the report (as on 5^th May 2020).

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.