UK Edition
Questor: a successful merger has brightened the prospects for this undervalued insurer
The outcome of a merger – beneficial to shareholders or otherwise – often takes time to become clear.
When two similar businesses merge, it is typically due to the presence of an industry-wide problem, triggering the need to reduce costs or focus operations on profitable operations.
This is the case with retirement specialist Just Group, the result of a merger concluded last year between two insurers Just Retirement and Partnership.
The merger stemmed from the aftermath of George Osborne’s radical reforms of pension legislation, announced in the Budget of March 2014 and effective from April the following year. In the case of Just Retirement, the share price fell more than 50pc.
The merged business offers retirement income through in the form of traditional individual annuities and equity release, where older homeowners borrow against their properties. It also provides insurance – or “de-risking” – services to companies that have defined benefit pension schemes.
A number of funds hold the stock in their top 10, including Franklin UK Mid Cap, Schroder UK Alpha Plus and Threadneedle UK Mid 250.
Just Group is the second-largest holding in the Threadneedle fund, which has returned 110pc over the past five years, compared to 69pc for the FTSE All Share index.
James Thorne, the portfolio manager, is drawn by the management’s strict commitment to high-margin business in areas where it has a competitive advantage.
Since the pension overhaul – which effectively ended the requirement for people to buy an annuity – many large insurers have withdrawn from the market. This has resulted in less competition and potential for higher-margin growth.
Mr Thorne said: “Just is a significant player in the ‘impaired’ annuity market, which provides income for those with health issues. Many of the largest companies have exited that market, and Just Group has data going back decades, which is critical to correct pricing.”
An unexpected trading update last week delivered good news to investors, with margins predicted to rise ahead of expectation, and significant sales growth.
The merger has also achieved its £40m cost savings target a year ahead of schedule, and is now aiming for £45m. Analysts monitoring the stock are also upbeat. Panmure Gordon and Numis both rate it a buy, with price targets of 207p and 220p respectively, compared to today’s 136p.
Panmure Gordon analyst Barrie Cornes said: “At the current share price, Just Group is trading on a price-to-earnings ratio of 8.4 for 2017 and 7.1 for 2018, which we view as a buying opportunity.”
There are however two factors that have concerned the market. The first is that the two largest shareholders, which account for nearly 40pc of the company, are private equity firms.
These holdings “will get sold at some point” said Mr Thorne.
Both Mr Thorne and Mr Cornes both drew a parallel between Just Group and wealth manager St James’s Place, which generated concerns when Lloyds Bank sold its stake in the business. This did not prove to be problematic.
“Since Lloyds sold its 60pc stake in 2013, SJP’s share price has doubled,” said Mr Cornes.
The second recent concern was Just Group’s £250m capital raising round last year, where it offered up a 9pc bond.
According to Mr Thorne, the market assumed that the high rate being offered meant that the business was struggling. This is not the case, he believes.
“If you don’t have a history of raising money you have to pay a high rate – Just Group’s 9pc was prudent, and their analysis was solid.” The bond now trades at a yield of 7pc.
Management wise, Mr Thorne said “there’s a depth of management beyond the board level” with ambition and a “good reputation”. The board itself “presents the business in a very balanced way, which makes it hard for investors to get excited.”
Numis analyst Marcus Barnard said: “We expect the company to be selective in writing new business, maintain strong margins, offer dividend growth of 6pc, and maintain surplus capital around or above £700m.”
Questor says: Buy
Price at close: 134.9p