Integrating Heritage And Open Divisions And Targeting £250 Million In Cost Savings Will Improve Operational Efficiency

Key Takeaways

• Integration of divisions aims to streamline operations, enhancing customer experience and net margins through cost reduction and efficiency.
  
• Expansion in Workplace and Annuities, alongside innovative products, is set to bolster long-term revenue and cash generation growth.
  
• High leverage, volatile earnings due to interest rates and hedging, and regulatory risks challenge profitability despite strong cash generation.

Catalysts

Operates in the long-term savings and retirement business in Europe.

• The integration of Phoenix Group's Heritage and Open divisions into a single operating model is expected to streamline operations and reduce costs, supporting long-term growth in revenue and net margins through enhanced customer experience and operational efficiency.
  
• The company is focused on expanding its Workplace and Annuities businesses and launching innovative retirement income products, which is expected to drive growth in operating cash generation and revenue over the long term.
  
• Phoenix Group is targeting significant cost savings, with a goal to achieve £250 million in annual run rate savings by 2026, which is anticipated to improve net margins through enhanced operational efficiency.
  
• The commitment to reducing the Solvency II leverage ratio to 30% by 2026 through continued debt repayment and own funds growth is likely to improve earnings stability and reduce financial risk, enhancing overall shareholder value.
  
• Ongoing investment in optimizing asset and liability management, including a focus on recurring management actions, is expected to bolster capital generation and support stronger earnings over time.

Phoenix Group Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Phoenix Group Holdings's revenue will decrease by 34.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.1% today to 5.0% in 3 years time.
• Analysts expect earnings to reach £356.5 million (and earnings per share of £0.34) by about February 2028, up from £-533.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £435 million in earnings, and the most bearish expecting £265.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.6x on those 2028 earnings, up from -9.7x today. This future PE is greater than the current PE for the GB Insurance industry at 11.5x.
• Analysts expect the number of shares outstanding to grow by 0.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.32%, as per the Simply Wall St company report.

Phoenix Group Holdings Future Earnings Per Share Growth

Risks

• The effects of higher interest rates have caused adverse accounting volatility, reducing shareholder equity and potentially impacting IFRS earnings visibility.
  
• The company reported a statutory loss after tax due to their hedging strategy impacting IFRS financials, which could continue to cause volatility in earnings.
  
• Despite strong cash generation, the leverage ratio is still high at 35%, and plans to reduce it to 30% depend heavily on debt repayment and achieving targeted operational efficiencies.
  
• There is inherent execution risk in integrating divisions and restructuring into new businesses, which may impact cost-saving targets and overall net margin improvement.
  
• Investors may have concerns regarding the company's approach to managing regulatory risks associated with new consumer duty measures on closed books, which could affect profit margins.

Valuation

• The analysts have a consensus price target of £5.893 for Phoenix Group Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £7.43, and the most bearish reporting a price target of just £4.85.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £7.2 billion, earnings will come to £356.5 million, and it would be trading on a PE ratio of 20.6x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of £5.19, the analyst price target of £5.89 is 11.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.