Chesnara: Market benefits overwhelm operational challenges

Chesnara plc (LON:CSN) has announced its 2021 full-year results. The headline figures are good, with Economic Value earnings of £57.8m. Within this, there were strong positive results from economic variances. Operational variances showed the effect of the challenges to the Swedish business, in particular, although their negative contribution of £32.6m was a distinct improvement on the £49.9m loss in 2020. The final dividend increased by 3% to give a total for the year of 22.60p. On the balance sheet, the growth in Economic Value was offset by adverse movements in exchange rates; net, it shrank by 2%.

  • Acquisitions: Since the results announcement, the acquisitions of Sanlam and Robein Leven have completed. The announcement was preceded in February by the issue of a £200m note at 4.75%. The latter signals that management is confident about finding more transactions in the near future.
  • Estimates: The additional bond interest will be partially offset by savings from repaying existing facilities and reduced tax. We have assumed no additional earnings from acquisitions in 2022, while, in 2023, they will offset the bond costs. Net, we have reduced our 2022E EPS by 2%, and 2023E by 3%.
  • Valuation: With a price at approximately two thirds of its Economic Value, Chesnara seems undervalued. A prospective dividend yield of 8.1%, with good prospects of continued growth, also suggests an undervalued stock.
  • Risks: Ultimately, the company remains tied to movements in financial markets and adverse developments in operational areas. Having just come through a testing period for the latter, in particular, we can see how well Chesnara can manage these challenges.
  • Investment summary: Chesnara has three pillars for delivering value, but also aims to be the “least troublesome source of sustainable, attractive dividend yield”. A close analysis reveals that there is substance underlying this aim. In our opinion, the discount to Economic Value looks wider than it should, and the yield appears high for a dividend that is both secure and growing.

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