As its depressed share price shows, this life assurer is out of favour with the City. This is due partly to the credit crunch, but also to a couple of aborted big deals.
I think there’s value here, however. In May, despite tough conditions, the group reported an 11% jump in first-quarter sales to £247m, beating City hopes. This was driven by its overseas units, with new business up 77% to £58m.
Friends Provident (FP), rated OVERWEIGHT by JP Morgan
Last October, a merger with closed life manager Resolution Group was scuppered by rival Pearl Group; then, in April, Friends Provident rejected a 150p-a-share bid (or £3.5bn) from private-equity house JC Flowers, which executive chairman Sir Adrian Montague described as “well south of what we [the board] felt was needed”.
Then there’s the radical turnaround plan – to streamline activities, cut staff and focus on the group’s core life assurance and pension interests – aimed at improving shareholder value. Its 52.6% stake in F&C Asset Management and its two advisory units, Lombard and Pantheon Financial, are now up for sale. This should release funds to invest in its faster-growing foreign activities. I also suspect that, once restructuring benefits have been obtained, there is a reasonable chance of future broker upgrades and maybe even another takeover approach.
So how much is Friends Provident worth, assuming a break-up? The three units for sale should fetch over £1bn. I’d put the UK life and international franchises on multiples of 1.0 and 1.2 times embedded value – giving valuations of about £2.2bn and £400m respectively. That suggests the group is worth north of £3.6bn, or 150p a share on a sum-of-the-parts basis. Assuming an aggressive trade buyer launched a new bid, another £100m a year in savings could come from combining the two businesses. These cost synergies after tax may mean around £700m (or 35p a share) of extra value, excluding gains from cross-marketing initiatives.
Fine so far, but are there any catches? Successfully executing the turnaround plan clearly adds risk, while the dividend is expected to be cut from eight pence in 2007 to around six pence in 2008, reflecting the group’s smaller size. Plus Friends Provident is subject to the usual investment and regulatory uncertainties within the financial services sector. Even so, with the shares trading at more than 20% below net assets and forecast to pay a healthy 5% dividend yield, the stock looks good value.
Recommendation: LONG-TERM BUY at 122p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments