Legal & General Group PLC

Legal & General Group Plc (LGEN) is a London, the United Kingdom-based provider of products and services related to insurance and investment management company. The company is not just into insurance anymore; it also provides investment management services and is among the top asset management companies. The company offers investments solutions to around 3,000 institutional clients. The company operates worldwide through its subsidiaries and associates; the United States and the United Kingdom being the primary markets.

Recent News
On 6^th June 2019, the company announced that the business had written a PRT (pension risk transfer) transaction in excess of £4.6 billion with the RRPF (Rolls-Royce UK Pension Fund), covering around 33 thousand in-payment pensioners.

On 31^st May 2019, following the revelation last month that Legal & General was in exclusive talks with Allianz Holdings, the company announced that it had agreed to sell its General Insurance business to the German financial services company for a base price of £242 million. After securing customary regulatory approvals, the proposed deal is likely to be completed in H2 FY19.

On 24^th April 2019, the company announces that it has agreed its first PRT transaction in Canada for more than CAD 200 million, i.e. around £114 million.

Dividend
The full-year dividend per share stood at 16.42 pence for 2018, up by 7% against the financial year 2017 data. The price of the full year 2018 dividend was £978 million, an increase from the fiscal year 2017 of £914 million.

Financial Highlights (FY 2018, £million)


(Source: Annual Report, Company Website)

In FY2018, the company reported total income of £1,264 million against £40,491 million in FY17. Total Operating profit from continued and discontinued operations surged by around 13.62 per cent to £2.33 billion and earnings per share (adjusted for one-off items) rose by 7 per cent to 24.7 pence. PBT (Profit before tax) was flat at £2.1 billion. Profit for the year decreased by 4.94 per cent to £1.8 billion against the £1.9 billion in FY17. Reported total basic and diluted earnings per share were 30.79 pence and 30.64 pence respectively.

The company’s capital position remained flat with a £6.9 billion Solvency II surplusas compared with the financial year 2017 data and a 188 per cent coverage ratio on a ‘shareholder view’ basis. The group’s return on equity was 22.7 per cent, a decrease of 2.9 per cent against the previous year data. This decrease was because of the reduction in profit after tax, mainly driven by a one-off tax benefit resulting from changes to the United States tax regime which benefitted in the financial year 2017.

Share Price Performance

Daily Chart as at June-19-19, after the market closed (Source: Thomson Reuters) 

On 19th June 2019, LGEN shares closed at GBX 268.60 and increased by 0.562 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 292.30/GBX 221.80. The company’s stock beta stood at 0.95, reflecting marginally lower volatility of the stock as compared to the benchmark index.

Valuation Methodology

Conclusion
The beginning of this year has seen decent economic growth in both the United Kingdom and some main Eurozone countries and the United States or China trade dispute has been affecting the company’s performance.

The group is well poised to grow further and take advantage of organic growth opportunities with the limited impact of political and economic uncertainties.The company continues to invest in technology and its balance sheet remains decent with a steady increase in surplus regulatory capital. The collective focus on structural growth themes such as ageing demographics in the UK, US and Europe should allow the group to continue its earnings trajectory for years to come.

The Board has adopted an advanced dividend policy, due to the company’s projected medium-term underlying business decent growth, including ‘Operating Profit’ and ‘Net Release from Operations’.
The company has shown good financial performance as compared to the last year. The current trading level indicates the stock movement towards 52-week high.

Based on the healthy financials and decent structural drivers, and supported by valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 268.60 (as on 19th June 2019) with single-digit upside potential based 8.92x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).
 

Aviva PLC

Aviva PLC (AV) is a British insurance group, headquartered in London, United Kingdom, which provides a wide array of insurance and savings products along with asset management business. The group consists of four operating segments: General insurance and health, Long-term business, Fund management and Other. The group also differentiates its operations based on geography, the segments are United Kingdom, Canada, France, Poland, Italy, Ireland, Spain and Other, Asia, Aviva Investors and Other Group activities.

Recent News
On 5^th June 2019, the company announced that the Board and Tom Stoddard have decided that Tom Stoddard will step down as a Director of the company and as CFO(Chief Financial Officer) from June 30, 2019.

Dividend
The company increased its total dividend per share by 9 per cent to 30.0p from 27.4p in FY17. In FY2018, the dividend payout ratio accelerated to 51.4 per cent.

Financial Highlights (FY 2018, £million)

(Source: Annual Report, Company Website)

The group’s adjusted operating profit rose by 2 per cent to £3,116 millionagainst £3,068 million in FY2017, driven by an increase in long-term savings and bulk purchase annuities in the United Kingdom. The group reported operating earnings per share of 58.4p, against 54.8p in 2017, reflecting an increase of 3.6p. The combined operating ratio (COR), which represents the underlying performance of the group, remained flat over the year and stood at 96.6 per cent. The group’s IFRS profit after tax stood at £1,687 million, against £1,646 million in FY17, while basic EPS grew to 38.2p from 35p in FY 2017. The net asset value per share (NAV) remained flat over the year at 424 pence.

Share Price Performance

Daily Chart as at June-19-19, after the market closed (Source: Thomson Reuters) 

On 19th June 2019, AV shares closed at GBX 416.30 and increased by 0.80 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 516.60/GBX 361.80. The company’s stock beta stood at 1.0, reflecting same directional movement of the stock as compared to the benchmark index.

Valuation Methodology


Conclusion
The company has decent fundamentals with a robust and resilient balance sheet, which is supported by the lower interest expense and a reduction in the weighted average shares in issue. The company's businesses, in their respective markets, are well positioned, and the overall performance has been steady with expectations to improve profitability in Canada.

The appointment of a new Chief Financial Officer will help the management to focus on reallocating resourcesand making progress on the company's priorities, like improve efficiency, optimise products, market portfolio and prioritise on debt deleveraging – which the group planned to reduce it by at least £1.5 billion by the end of the year 2022.

Based on the healthy financials and decent structural drivers, and supported by valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 416.30 (as on 19th June 2019) with single-digit upside potential based 7.58x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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