LGGNF - Legal & General: Time To Increase

2023-03-15 11:50:23 ET

Summary

• PRT market opportunity coupled with international growth will support L&G's diversified business model.
• Strong balance sheet and another DPS increase.
• The company is well on track to achieve its five-year plan. Here at the Lab, we confirm our valuation.

In our last publication called time to re-enter , we went deeper into Legal & General Group Plc analysis ([[LGGNF]]; [[LGGNY]]) and add more color to our long-standing buy. Last week, the company released its annual data, and cross-checking our main investment recap, we are providing an update:

1. " Interest rate increases coupled with credit spread widening are generating further growth in the PRT division (pension risk transfer) because the fund level materially improved ". Our team's attentive eyes didn't miss out on the company's half-year PRT evolution and now, L&G declared that it might be a good opportunity to write more than £8-10 billion per annum of UK PRT over the next few years. As already mentioned, rising interest rates will further accelerate the PRT market opportunity (Fig 1) and according to the company's indication every £10 billion of PRT will create £1.5 billion of cumulative Solvency II for the group;
2. " Related to the higher interest rate, L&G's solvency requirement will benefit from this environment ". The company's balance sheet is stronger than ever and this is also confirmed by its Solvency II ratio evolution which reached 236% compared to the 187% achieved in 2021 (Fig 2);
3. "L&G is looking to other geographies to diversify its turnover and is targeting the US". L&G is replicating its model in the US with the Ancora L&G segment, while in Europe and Asia, the company launched the CleanTech funds. In total, there is a target to achieve 600/700 million in core operating profit with of an AuM of £25/30 billion. Currently, L&G international AuM represents 37% of the total company's flow;
4. "Here at the Lab, we are confident that L&G's excess capital will be used for higher dividend growth". Indeed, and again, this is what happened. The company has developed a sustainable and capital-light growth model where Operational Surplus Generation outpaced dividend payment; so L&G increased its DPS by an additional 5% (Fig 3);
5. Aside from the micro consideration, our buy was also supported by a solid dividend yield and a compelling valuation, which today we fully reiterate.

(Fig 1)

(Fig 2)

(Fig 3)

Conclusion and Valuation

L&G confirmed its ambitious plan with supportive projections until 2024. After having listened to the Q&A analyst call, again we do have a feeling that the company will exceed expectations. Operating profits were up by 12%, ROE reached 20.7% and according to our estimates, the Solvency ratio will exceed 240% (making the insurer even more resilient at macroeconomic uncertainties). L&G affirmed a Cash generation of £5.1 billion and capital generation of £4.9bn with a surplus over a dividend payment of £0.7 billion. With a dividend yield of almost 7.5%, we reaffirm our £3.5 target price ($21.3 in ADR) against the current stock price of £2.41 per share. The company is also trading on 1.07x 2023 expected shareholder value, which is not in line compared to its historical average of 1.22x.

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