An anagram of life assurance company Chesnara is Earn Cash. The play on words is not deliberate but it is highly appropriate because Chesnara offers some of the most generous dividends on the stock market.
The company was originally part of estate agency chain Countrywide but it established an independent identity in 2004, when the rest of the Countrywide group was sold to US private equity firm Apollo Management.
Chesnara swiftly bought another UK life assurance business and by 2005, it had around 180,000 policyholders and more than £1 billion of assets under management.
From the beginning, the business was closed, meaning that it was focused on existing policyholders, rather than acquiring new ones. This type of life company is much cheaper to run as money does have to be spent trying to find new customers or setting up new policies.
In fact, chief executive Graham Kettleborough has been determined to run a tight ship from the outset, keeping costs down to a minimum and ensuring there is plenty of cash available to pay out in dividends to shareholders. Until quite recently, the company had just 16 employees, working on regulatory matters and strategy. Investment management was outsourced to the fund managers Schroders and Henderson and all the back office work is done by external companies as well.
Kettleborough has a strong pedigree. Aged 53, he has been involved in the life assurance industry since leaving school and has acquired a loyal shareholder following.
My colleague Andy Brough highlighted Chesnara last May, since when the company has gone from strength to strength. Closed life businesses are cash-generative but they do have a shelf life – as policy-holders either choose to stop paying their premiums or pass away, the money earned gradually decreases. Kettleborough intends to counter this by acquiring new businesses and in July he bought Swedish life business Moderna from a troubled Icelandic bank. Such was the bank’s need for cash that it sold Moderna for £20 million even though the business has an underlying value of around £50 million.
The deal was extremely well received by investors. Moderna is still open for business so it has more expenses than Chesnara’s UK life operations but Kettleborough is confident this will not affect dividend payouts. From 2012, Moderna is expected to make a meaningful and positive contribution to earnings and support future dividends.
In the meantime, Moderna has taken the number of policyholders to 2.5 million and Kettleborough is looking for other acquisitions of up to £200 million.
Midas verdict: Brokers forecast a dividend of 16.2p for 2009, rising to 16.7p the following year. The shares are 170p, so they are yielding nearly 10 per cent, which is particularly attractive when savings rates are so abysmally low. Kettleborough may ask shareholders to help fund an acquisition in the future but he has recourse to debt finance as well and has pledged only to buy businesses that will enhance growth. Chesnara is well-run, conservatively managed and has benefited from the stock market’s strong run over the past three months. There has also been a raft of takeover activity in the life assurance industry and Chesnara is a classic bid target for a larger player. Buy.
Coal of Africa (CZN – Aim)
Coal of Africa, as its name suggests, is a coal mining company operating principally from South Africa . Run by resolute Australian, Simon Farrell, the business focuses on two types of coal – thermal coal, used for power generation, and coking coal, used to make steel.
Mining in South Africa is a complex business, involving reams of bureaucracy to ensure mines comply with social, ethical, environmental and health and safety regulations. Black Economic Empowerment (BEE) is an issue too, a government initiative that requires companies to employ a certain proportion of black workers and to have black representation on the board.
Midas Extra, the midweek subscription-only column available to all readers of the Mail on Sunday, recommended CoAL (as it is known) in May, when the shares were 69p. Since then the company has had a busy time, fulfilling mining compliance regulations, making progress on BEE and starting to dig up coal from the ground.
Last month, leading brokers, JP Morgan Cazenove and Morgan Stanley began looking at the company, both suggesting the shares were a buy, and last week, the company reached agreement on BEE. The shares have performed so well that, last Monday, Farrell was forced to put out an announcement, refuting speculation that CoAL was in takeover talks.
CoAL should have an exciting future, nonetheless. Its first coking coal mine will be given a licence to operate within weeks and its second such mine should be licensed next year. Currently, the company is loss-making, in common with many early-stage miners, but it should move into profit next year and earnings are forecast to surge from 2011. Thermal coal prices have moved steadily ahead over the past few months but coking coal, which is in shorter supply, has surged in price, reflecting ongoing demand for steel, particularly from China .
Midas verdict: CoAL is now trading at 121p, so it has almost doubled in value over the past five months. Investors who bought back in May should sell a third of their holdings but keep the rest as this business could – and should – continue to deliver. New investors may even consider buying a few at current levels.
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