AEGOF - Aegon: The Capital Markets Day Confirmed Our Thesis Buy Reiterated

2023-06-23 07:41:06 ET

Summary

• Aegon is raising the bar on FCF generation thanks to a solid strategy in the US.
• AEG aims to pay a dividend per share of €0.4 by 2025, yielding 9% on 2025 estimates. This is well covered by Aegon's operating cash flow.
• Aegon's valuation is supported a.s.r. transaction, an ongoing buyback, and a deleveraging strategy.

Aegon ( AEG ) just released its capital market day presentation with a supportive title called: " The Next Chapter ." At the Lab, we are delighted with Aegon's new financial goals because the company has a solid track record and confirmed all the financial targets set in the 2020 Capital Market Day (Fig 1). Secondly, we positively view a.s.r. transaction, endorsing (once again) our January publication titled: " Deal To Benefit All ."

In detail, Aegon reported five key highlights: 1) accelerating its development in retirement, protection, and investment solutions, 2) growing its American franchise, 3) closing a.s.r. transaction, 4) adding financial flexibility at the holding level, 5) deleveraging and executing a buyback thanks to point 3), while continuing to remunerate shareholders with a higher dividend per share evolution.

Before updating our financial forecast, we must recap that Aegon has limited exposure to " Credit Suisse's AT1 ". In addition, the capital market day economic release was already well priced in by our internal team. Here is a snap of our latest publications :

Changes in our estimates

Here at the Lab, we are supportive of the insurance sector. This is mainly due to a higher reinvestment yield thanks to interest rate development and a better evolution of the combined ratio. Over the years, Aegon has focused on cost optimization, and a lower combined ratio means higher profit at the core operating activities. Starting with the CEO's words , today, the company " is a more focused company with improved operational performance, a stronger balance sheet, and an enhanced risk profile. " In our internal estimates, following the capital market release, we projected:

1. €1.5 billion buyback from a.s.r. transaction with an expected timeframe of 1 year - this is due thanks to the a.s.r deal, which is forecasted to be completed in the coming weeks
2. €700 million financial debt reduction expected to be completed in 1 year following the above point 1
3. Without considering the expected synergies from ASR Nederland N.V. ( OTC:ARNNY ), the bank is currently valued at €5.8 billion . Aegon will receive an equity stake of 29.9%, equivalent to €1.75 billion (Fig 1). The new combined entity will create a market leader in the region, and Aegon will continue to offer its product thanks to a.s.r. retail branches. This creates a valuable opportunity that cannot go unnoticed
4. We are forecasting better estimates in Aegon's US subsidiary. The company aims to increase its agents to 110,000 units by 2027 to capture the entire market potential, which according to the company, is underpenetrated (Fig 2). Currently, Aegon employs 70,000 independent agents. As a reminder, agents are only paid on certainty revenue generation as a variable cost
5. The company will also continue to invest in its UK division and support its global asset manager with JV to drive growth in alternative asset solutions (Fig 3). This strategy is very similar to Legal & General ( a company that we follow ), which successfully delivers solid revenue fee generation
6. For the above reason, we are forecasting a capital generation of €1.3 billion by 2025 (higher than management's estimates). This is due to the company's solid track record
7. In our internal estimates, we are forecasting FCF of €650/750/800 million in 2023/2024/2025, respectively
8. More importantly, Aegon will likely reduce its Cash at Holding without compromising its solid solvency ratio. We like this implementation for three reasons: 1) Aegon's ability to generate recurring cash flow, 2) sustain a higher shareholder distribution policy, and 3) higher investors' credibility (lowering your capital requirements while increasing your remuneration is unusual). In our insurer universe coverage, only Zurich could implement this strategy in late 2021 and early 2022. In detail, looking at the latest presentation, Aegon aims to pay a dividend per share of €0.4 by 2025. At the current stock price, Aegon is yielding 9% on 2025 dividend estimates. As abs value, our forecasted total dividend payment is estimated at €217/251/286 million in 2023/2024/2025, respectively. Therefore, in our three-year visible period, FCF generation covers Aegon DPS very well (point 7)

Fig 1

Fig 2

Fig 3

Valuation and Risks

Regarding the valuation, we are well above Wall Street analyst consensus. Therefore, we confirm our valuation supported by a target P/E of 8x, and we arrived at a buy rating target price of €5.7 and $6.1 in ADR. To support our valuation, Aegon is currently trading at a P/E of 6x while our insurance EU coverage is almost 10x ( Allianz , Zurich , AXA , and Generali ). A discount is also evident in the price-to-book value (0.79x vs. an average of 1.33x). Aegon's downside risks include failure in a.s.r. merger, market volatility, increasing risks in cybersecurity, labor shortage with wage inflation, higher natural catastrophe expenditure, and execution risks on its Transamerica strategy.

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