2023-10-10 12:36:43 ET
Summary
- We are unsurprised by the takeover rumors, given Aviva's current undervaluation.
- Aviva offers a total yield of approximately 12% in 2024.
- Solid balance sheet, upside in the current inflationary environment not priced in, and an ongoing buyback. Our buy rating is then confirmed.
Here at the Lab, we recently commented on Aviva's H1 financial release (AIVAF) (AVVIY). Our buy case recap was supported by a solid execution (organically and inorganically), a tasty DPS, a non-positive stock price momentum not paired with a fall in profits, a safe balance sheet thanks to accumulative cash remittances and an accelerating growth in its asset-light businesses. We usually do not comment on takeover speculation; however, three days ago, Aviva was up by more than 10% as The Times cited a potential bid for the company. In detail, the British newspaper Times reported rumors of a possible takeover by a foreign buyer with Allianz (covered by the Mare Evidence Lab team), Intact Financial Corp, and Try Group reportedly on the lookout. The news also mentioned an (unnamed) US insurer interested in Aviva. However, we should report that none of the above companies disclosed positively in response to the report.
M&A Speculation and Our Thoughts
Given that we are the first believers in Aviva's current undervaluation, we are unsurprised about a potential takeover. The company appears inexpensive, given its Canadian P&C franchise and UK Life profit generation. Looking back, the company performed a business transformation thanks to Amanda Blanc, and the company currently offers:
- a 12% capital return made by 1) its ongoing dividend, which was also recently increased for a total yield estimates of 8%, 2) a 2% uplift in Aviva's cash remittances projection, and 3) a £300 million share buyback calculated on the company's current market cap which is now is yielding approximately 2%;
- a discounted valuation on a 2024 8.5x price-earnings multiple. One-quarter of Aviva's operating profit is coming from its Canadian division. However, its closest Canadian competitor (Intact Financial Corp) trades at a 2024 P/E ratio of more than 14x.
Having said that, a transaction is not a likely scenario. Why? In 2020, Allianz acquired LV non-life insurance and is now the second non-life insurer in the UK (after Aviva). Therefore, here at the Lab, we believe a combined merger might pose a regulatory risk. In addition, looking at Allianz's combined ratio development, the company has lower profitability in the UK market and would be decremental to the German company on a P&L basis. On the other hand, we believe that Intact is unlikely to be keen on the United Kingdom life market. Any takeover could be challenged and require an additional acquirer to dispose of Aviva's UK operations (50% of its profits).
Aviva's latest news and Conclusion
In September, Aviva acquired the life business of AIG in the UK for a total consideration of £460 million (€531.8 million). This is the largest acquisition closed to date under Amanda's direction. Blanc, appointed CEO in July 2020, had refocused and rationalized Aviva's operations, selling foreign subsidiaries and concentrating the company's core operating activities in Great Britain, Ireland, and Canada. The CEO transformed the insurer into a more agile company, returning significant capital to the shareholders. Here at the Lab, we believe the new Aviva has a more straightforward structure and is poised to grow over the long term. We are still bullish on Aviva's equity story based on:
- The company's UK commercial insurance footprint that creates profitability diversification against vs. a more challenging Life market environment;
- Aviva's UK life opportunity with a focus on pensions, as well as its market share in retirement and protection. In detail, in the life business, we anticipate a core operating profit growth of 1/2% per year; however, the PRT division might benefit from new business based on the higher retirement. As a reminder, the company is the market leader in the UK, and this is a recurrent safer source of FCF;
- Here at the Lab, we also like Aviva's GEO diversification, given the Canadian operations;
- Business-wise, Aviva is likely to price inflation peak in its insurance policy. There is still no indication; however, we believe that the company's combined ratio might increase its near-term profitability;
- Looking back, the company has a solid track record in shareholders' remuneration. The current balance sheet provides additional capital return to shareholders. Based on the company's projection, we believe this £300 million share repurchase will be replicated beyond 2024.
As a recap, even if we are not pricing a potential M&A premium on Aviva, we believe this news is a positive upside to our investment story. Aviva is cheap and offers a total capital return of approximately 12% in 2024; the company's valuation is cheap vs. its closes multiples and on a price-to-book value at 1.2x compared to a historical average of 1.5x. Therefore, given our recent update on the h1 results, we confirmed our target price set at £5 per share ($12 in ADR).
For further details see:
Why Aviva Is Not Likely A Potential Takeover Candidate