September 26, 2020

Aviva: Swift Divestiture Shows New CEO Means Business (OTCMKTS:AIVAF)

U.K.-based insurer Aviva (AVIAF, AVVIY) recently outlined its planned strategic shift. Key to the business was the plan to divest non-core overseas assets, although for shareholders equally important is a review of the high yielding dividend, which I expect to be cut.

The company has announced a partial divestiture of its Singapore business which, given the swiftness since the previous announcement of the strategy of focusing on core business, suggests that the new chief executive is not wasting any time. I remain down on the stock, as I expect a dividend cut which will reduce its primary attraction as a high yielder. Nonetheless, the speed of the latest move is noteworthy as it suggests that Aviva may be changing quite a bit under its new leadership.

Aviva Will Sell Its Majority Singapore Holding

The company announced that it will sell a majority shareholding in Aviva Singapore to a consortium led by Singapore Life Ltd. Initially the company will be branded in Singapore as “Aviva Singlife”. Singlife is a consortium which includes TPG, Sumitomo Life (part of the Sumitomo Group of companies (OTCPK:SSUMF)), and others.

Upon completion, Aviva is set to receive SG$ 2.7 billion (approximately £1.6 billion) in consideration. This comprises SG$2 billion (approximately £1.2 billion) in cash and marketable securities1, SG$250 million in vendor finance notes and a 25% equity shareholding in the new group.

The company stated that the transaction would have had the effect, for example, of increasing its net asset value at 30 June 2020 by £0.7 billion, strengthening Solvency II capital surplus by half a billion pounds and increasing the Group Solvency ratio on a shareholder basis by approximately 4 percentage points.

In 2019, Aviva Singapore’s IFRS profit after tax was £83 million and it remitted £46 million cash to the group. The gross assets of Aviva Singapore were £6.6 billion at 30 June 2020. So I would say that the company got a decent price for it.

The Singapore Sale Shows a Bias for Action

The new chief executive has been in office for a little over two months. The company has only recently outlined its new strategy, which it summarizes thus:

We will focus on those markets or products where we have the necessary size, capability and brilliant customer service to generate superior shareholder returns.

Specifically, the company said that it would focus on the UK, Ireland and Canada, markets in which it considers that it has sufficient scale. That was elucidated in its results announcement last month. So, on one level, the fact of largely getting out of the Singapore business ought not to come as much of a surprise. What is surprising is the speed with which it has materialized. It is also noteworthy that the sale is not a fire sale at weak prices – the company is doing quite well from the terms of the proposed sale, in my opinion. No doubt TPG can squeeze more money from the business than Aviva managed, but if so then selling it for a good price to them and maintaining a minority stake is a good outcome for Aviva. Singapore is a stable market, but it is small and Aviva has had no shortage of opportunity to make it work for it to this point.

So, the deal looks good to me, and the speed with which it has been agreed suggests that the company’s new chief executive really means business. Historically the size and bureaucracy of the Aviva business has been a disadvantage in getting things done, but if the chief executive has found a way to deliver the strategy despite that – and at speed – then that suggests that results could start to improve.

This is a Good Start, But it Doesn’t Change the Investment Case Yet

I remain concerned that the company plans to cut its dividend, as I outlined in my previous piece. That reduced the investment case, which has been built around the thesis that the company lacks meaningful growth prospects but is a reliable high yielder.

The dividend remains liable to be cut, in my opinion, so for now I remain neutral on the stock. However, the latest development is positive in so far as it may be indicative of delivery of a strategy which through its focus on scale markets could lead to growth, which could lead to me improving the rating on the company again. For now, one sale is not sufficient evidence that the company is on a path to grow. But it is a positive indicator and if more follow, Aviva may become an attractive investment again, even with a dividend cut. For now, we are in wait and see mode.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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