Aviva (AV.) has struggled to achieve growth in the post-financial-crisis era. After years of sluggish growth and getting hit by large losses in the US annuity business, the company has completely overhauled its operations and management, and 2012 was a year of transition at Aviva. The company hired former AIA executive Mark Wilson as CEO, and within three months he has made significant progress in cutting exposure to underperforming markets and products. Toward the end of 2012, the company announced the sales of the US insurance business and the Malaysian joint venture. The new strategy appears to have brought more focus to the company's capital strength and operational efficiency.
2012 was a year of transition at Aviva
All told, the company's results were marginally lower than our expectations. Operating profits for the full year were £1.78 billion, down 4% from last year, partly due to an unfavourable foreign exchange impact. The company reported a full-year net loss of £3 billion following a £3.3 billion write-down on the US disposal. That said, economic capital surplus has more than doubled from last year's level, reaching £7 billion following the asset sales.
A Surprise Dividend Cut
Perhaps the biggest surprise is the company's decision to cut its full-year dividend to 19p per share, versus 26p per share last year. Management wants to conserve cash flows and pay down debt, as debt levels have shot up 9 percentage points to 50% of equity. Reducing debt to below 40% is a top priority for the company.
The decision to cut the dividend drove the high-yielding shares down by 12.5% for the day on the London Stock Exchange, and this could lead to an attractive entry point for risk tolerant investors, in our view. Admittedly, turning around a heavily Europe-focused Aviva could be a big challenge, with several of the company's target markets barely meeting the target return on capital.
Goals for 2013
Cash flow generation and leverage reduction are the two main tasks for the company in 2013, as the company has been paying dividends with cash that it didn’t have. The US business sale, while strategically imperative, resulted in a sharp reduction in book value and consequently an increase in the debt leverage ratio. The desire to reduce leverage led to the decision to cut the dividend, and management indicated that the 2013 dividend could be reduced further. Despite substantial losses, we remain somewhat positive on the company’s outlook. Aviva is a turnaround story, and we think, in the near term, the company will focus intensely on capital surplus and cash flow generation from its three core businesses. While future growth will be relatively modest for the company, we think the company will eventually rebuild itself with a more robust balance sheet and capital position.
This article was extracted from Vincent Lui's in-depth research report on Aviva. Premium subscribers can read the full report here.
