Takeover talk has not left M&G since it was spun out of the Asia-focused insurer Prudential four years ago.
The asset management specialist has been valued at a perennial discount to peers. Despite the shares outperforming rivals like Jupiter, Schroders and Abrdn since the demerger, they still trade at an undemanding ten times forward earnings. That leaves the group in play for an acquirer that could strip out costs from the business.
Andrea Rossi, the boss of the FTSE 100 constituent, has put in place a three-year plan to cut costs by £200 million (excluding inflation), bring down the cost-to-income ratio of its asset management arm to below 70 per cent and reduce leverage to sub-30 per cent. Top of the pile is a target to generate £2.5 billion in capital a year earlier.
Progress towards these goals has been mixed. Capital generation came in at £505 million over the first half of the year, way ahead of a consensus forecast of £328 million and an increase on the £433 million over the same period last year. That leaves the group over halfway to hitting its cash generation target by the end of the next financial year, having churned out £1.3 billion in 18 months.
But it is worth noting that the annual increase, and a quarter of capital generated last year, was driven by switching out of equity and towards higher-yielding fixed income for its with-profits funds. The more important underlying capital generation — turned out by the core asset management and retail and savings businesses — was dented as institutional clients pulled out cash.
The health of the asset management arm is key to M&G sustaining its capital generation and dividend over the longer term. The cost-to-income ratio for that division worsened to 79 per cent from 77 per cent last year after costs rose by 7 per cent and revenue declined by 3 per cent during the period.
Net outflows from the business amounted to another £100 million, on top of the £200 million last year after the mini-budget spooked investors, and assets under management were 5 per cent lower. Outflows were clustered around lower-margin fixed income mandates from large investors, which blunted the impact on the top line. But that still puts the business a way off its goal of a sub-70 per cent margin.
M&G’s key attraction is its beefy dividend, which was raised to 6.5p a share. Analysts think that payment will amount to 20.08p this year, which leaves the shares offering a potential yield of 9.9 per cent at the current price.
Can it be relied upon? In the near future, it looks secure enough. Even the £352 million generated by the underlying business is easily clear of the £153 million cost of the interim dividend declared for the period.
Further off, investors might question the sustainability of the dividend. Just over half of the capital generated by the firm in the first half was turned out of the heritage business, which is in run-off. Between £1 billion and £1.5 billion heads out the door each year as books mature, a figure offset by the rest of the business.
Re-entering the bulk-purchase annuity sector is one way that M&G is looking to offset the shrinking heritage business over the longer term. Two deals worth a combined £617 million have been completed thus far.
There are plenty of areas that could unlock value for a bidder. Removing some of the organisational complexity after its demerger from Prudential is one. The private assets it is building, amounting to £74 billion at the end of March and accounting for a quarter of the total being run by its asset management arm, could also be appealing for a rival looking to diversify out of less profitable public market investments.
ADVICE Hold
WHY The group is a potential takeover target and offers a high dividend yield
Supermarket Income Reit
Cooler inflation data released yesterday raised expectations that the Bank may hold off on increasing interest rates, or at least that monetary tightening is nearing its peak. If accurate, London-listed property groups should be in store for some much-needed relief.
For Supermarket Income Reit, whose tenant base is dominated by Britain’s big four grocery chains, there are signs that the value of its estate might have already reached the bottom.
The underlying value of its properties at the end of June was flat on the end of last year, which kept its tangible net asset value (NAV) at 93p, ahead of analyst expectations.
That makes the shares’ 14 per cent discount against the NAV forecast by analysts for the end of this financial year more of an appealing trait than a warning sign. Analysts think the NAV will return to growth at the end of June next year.
The sale of a group of 26 stores back to Sainsbury’s earlier this year banked £431 million for the Reit, part of which was reinvested into cheaper supermarket properties and the rest into paying down debt.
That has reduced the company’s loan-to-value ratio to 34 per cent, a comfortable leverage position that means it could withstand a 40 per cent fall in the value of its portfolio — and that is from the current depressed level — before it comes near breaching its covenants.
Just over three quarters of the rent roll is linked to a measure of inflation on review, with a 4 per cent cap, which explains a 2.7 per cent underlying increase in rental income last year. That gives a certain degree of reliability to its income stream, which has an average unexpired lease term of 14 years.
The FTSE 250 constituent is now targeting an increased dividend of 6.06p a share for the current financial year, which leaves the shares offering a potential yield of 7.7 per cent at the current price.
Last year’s payment was uncovered by adjusted earnings, pre-bulk Sainsbury’s sale, but analysts believe that this year’s payment will be covered — just — by earnings.
That would make the discount baked into the shares even harder to justify.
ADVICE Buy
WHY The shares offer a generous dividend yield at a cheap valuation
