There was a time when Phoenix Group, and companies like it, complained bitterly about being referred to as the operators of “zombie” funds. It was a minor insult, they said, to refer in this irreverent way to their specialist areas of managing books of closed life and pension funds that were no longer open to new customers.
Phoenix, at least, need fret no longer because, as of last year and a deal with Standard Life Aberdeen, plenty of the funds it manages are not only not zombies but are very much alive.
Phoenix was created through a series of mergers, including of Pearl Life and Scottish Mutual Assurance, all involving combinations of books of closed policies. In the case of life insurance — to put it bluntly — if a customer hasn’t died by the time their policy matures, all the money they’ve paid in previously is released as pure profit for the provider. Similarly with a pension scheme: some of the capital held in reserve to protect policyholders’ money is freed up each year after retirement payments have been made and again can be booked immediately as profit.
Because combining various funds creates substantial cost-saving opportunities and economies of scale, Phoenix was at the centre of a clutch of hard-fought mergers between various providers, culminating in the combination in 2006 of Pearl and Resolution. It took the group pretty much until last year to recover from the burden of the £4 billion in debts taken on at the time of the acquisition — which was swiftly followed by a financial crisis that decimated policy values — and to be in a position once again to pursue fund deals.
Then, in February 2018, Phoenix spent £2.9 billion buying Standard Life Aberdeen’s life business, at the same time selling the merged fund manager a 19.99 per cent stake and agreeing a partnership deal involving the sales of new policies. The rationale is clear: growth in sales of new policies through the partnership should more than offset a gradual decline, of about 5 per cent a year, in the amount of cash generated by the closed books as funds mature and are not replaced.
In practice, things seem to have worked out even better than both sides expected. At its annual results in March, Phoenix reported a net inflow of £3.7 billion of funds into its open books, taking its total of “alive” policies to £85 billion, against its closed book, with £118 billion.
Success in both divisions meant that Phoenix generated £1.3 billion in cash in 2017 and 2018 combined, comfortably ahead of its target of between £1 billion and £1.2 billion. That, in turn, has encouraged the group to set an ambitious target of generating £600 million to £700 million in cash this year as part of a five-year aim of getting to £3.8 billion.
The group comfortably generates enough cash to meet its debt repayments, of £88 million last year, and it is already talking about further future acquisitions.
Phoenix also increased all of its cost-savings targets in March, most strikingly adding £500 million to its total hoped-for savings, for a figure of £1.22 billion.
All this cash generation helps to bolster the dividend, set at 46p last year but effectively annualised at 46.8p a share for the next few years. The payout, which feels quite conservative, gives Phoenix’s shares an enticing yield of about 6.6 per cent, according to a Numis forecast.
The shares, down 7¼p, or 1 per cent, at 679¾p yesterday, trade on a multiple of about 20.3 times the broker’s forecast earnings. This column recommended holding the shares in March, when the price stood at 710p. If they continue to fall, buy them, they should come back.
ADVICE Buy on weakness
WHY Super-strong cash generation, attractive dividend and the chance of further deals
Polypipe
This group describes itself as a “leading provider of sustainable water and climate management solutions for the built environment”, which translated out of corporate-speak means that it makes pipes and drains. Importantly, it makes them in plastic.
The company was founded in Doncaster in 1980 by two entrepreneurs, one of them a former plumber. Owned during its life by both management teams and private equity, it was listed on the stock market in 2014 for 245p a share and is a constituent of the FTSE 250.
Its core products are the plastic guttering and drainage pipes used in residential homes, as well as in high-rises, hospitals, schools and shopping centres. It also supplies piping to large-scale industrial and infrastructure projects, including roads, and sells its kit to the trades for repairs and improvement jobs. In addition, it makes the drainage systems used in roof gardens and supplied the under-turf system at Totteham Hotspur’s new football stadium in north London that helps to keep the pitch in good condition.
Polypipe’s business model is benefiting from the gradual move away from steel and concrete pipes and into cheaper, more durable plastics. Plastic is hardly a fashionable material, but, in its favour, about 40 per cent is recycled.
Of additional interest, the group has been making smallish acquisitions, including spending £52 million in October buying Manthorpe Building Products, which makes the plastic fixings that keep tiles on roofs.
Polypipe clearly is exposed to shifts in the housing and construction markets and to the lumpy nature of infrastructure revenues. While residential property has held up well, construction has been under pressure. Against that backdrop, it is an established, high-quality player, notching up perfectly respectable recent increases in annual revenues and profits. The shares, off 3¼p, or 0.7 per cent, at 431½p yesterday, cost just over 14 times Peel Hunt’s forecast earnings, for a yield of 3 per cent.
A strong run in the shares, which are up more than 30 per cent this year, suggests that they are fully valued for the moment.
ADVICE Avoid
WHY Highly respectable player. Strength is in the price
