Helios Underwriting — Capacity increase supports strong growth

Helios Underwriting (AIM: HUW)

Last close As at 13/04/2024

GBP1.66

−9.00 (−5.14%)

Market capitalisation

GBP125m

More on this equity

Research: Financials

Helios Underwriting — Capacity increase supports strong growth

Helios Underwriting reported a 27% increase in Lloyd’s of London (Lloyd’s) underwriting capacity for the start of 2023 to £296.6m, with historically high pre-emptions offered by its syndicates and additional tenancy capacity purchased in the Lloyd’s auctions as the main drivers. Retained capacity grew by 39% to £238.3m on the back of a lower level of reinsurance. Capacity growth was supported by a successful capital raise of £12.5m gross in November 2022. The company also announced the acquisition of three limited liability vehicles (LLVs) in December 2022, which resulted in a modest £5.7m addition to capacity. The strong increase in capacity has prompted us to lift our underwriting premium forecast, with a resultant increase in our earnings forecast for FY24. We increase our valuation by 5% to 252p/share.

Marius Strydom

Written by

Marius Strydom

Analyst

Lloyd’s Building

Financials

Helios Underwriting

Capacity increase supports strong growth

Capacity update

Insurance

13 February 2023

Price

157p

Market cap

£121m

Net cash (£m) at 30 June 2022

21.1

Shares in issue

77.3m

Free float

46.4%

Code

HUW

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.7)

0.0

(3.7)

Rel (local)

(6.1)

(6.0)

(4.1)

52-week high/low

195p

144p

Business description

Helios Underwriting was established in 2007 (as Hampden Underwriting) primarily to provide investors with a limited liability direct investment into the Lloyd’s insurance market. It is an AIM-quoted holding company, providing underwriting exposure across a diversified portfolio of selected Lloyd’s syndicates.

Next events

FY22 earnings release

June 2023

Analyst

Marius Strydom

+44 (0)20 3077 5700

Helios Underwriting is a research client of Edison Investment Research Limited

Helios Underwriting reported a 27% increase in Lloyd’s of London (Lloyd’s) underwriting capacity for the start of 2023 to £296.6m, with historically high pre-emptions offered by its syndicates and additional tenancy capacity purchased in the Lloyd’s auctions as the main drivers. Retained capacity grew by 39% to £238.3m on the back of a lower level of reinsurance. Capacity growth was supported by a successful capital raise of £12.5m gross in November 2022. The company also announced the acquisition of three limited liability vehicles (LLVs) in December 2022, which resulted in a modest £5.7m addition to capacity. The strong increase in capacity has prompted us to lift our underwriting premium forecast, with a resultant increase in our earnings forecast for FY24. We increase our valuation by 5% to 252p/share.

Year end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/21

70.6

(1.9)

(0.8)

3.0

N/A

1.9

12/22e

137.6

(1.6)

(1.2)

3.0

N/A

1.9

12/23e

218.7

20.8

21.8

6.0

7.2

3.8

12/24e

232.9

29.7

31.3

15.4

5.0

9.8

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Successful capital raise supports capacity increase

Helios’s November 2022 capital raise of £12.5m gross was concluded at a price of 156p/share, in line with the market closing price on 22 November 2022 and above end-H122 NAV of 149p/share, resulting in an 8m increase in shares in issue to 77.7m (77.3m excluding treasury shares). The proceeds allowed the company to conclude three LLV transactions in December (adding £5.7m to capacity), to follow £36m in pre-emptions offered by its syndicates and increase its tenancy capacity (short-term capacity not valued in the balance sheet) by £38.9m. This was offset by £16.7m in net capacity sales at the Lloyd’s year-end auction.

Near-term earnings pressure followed by upside

Two factors have weighed on Helios’s FY22 earnings expectations, resulting in a downgrade to our EPS estimates in September 2022. Weak investment returns on the back of rising yields, which affected mark-to-market fixed interest portfolios, continued in H222 but have already been considered in our forecasts. Claims expectations have deteriorated somewhat since the half year-end and we have increased our allowance to account for the war in Ukraine and Hurricane Ian. The net impact is for a downgrade to FY22e EPS from a loss of 1.1p to a loss of 1.2p. However, much higher capacity at the start of 2023 means our FY23 EPS forecast is broadly unchanged, while we upgrade FY24e EPS by 4% to 31.3p.

Valuation: 252p/share on stronger capacity profile

Helios’s capital raise above NAV per share has left our valuation largely unaffected. However, the meaningful beat on 2023 capacity has led to an enhanced earnings outlook, which supports a 5% upgrade in our valuation to 252p/share. There is further valuation upside if Helios can generate more working capital for deployment in underwriting capacity growth, boosting value drivers.

Capacity growth on the back of capital raise

Underwriting capacity is the lifeblood of Lloyd’s syndicates and of Helios as an aggregator of syndicate exposure. The capacity owned by syndicates or by Helios through its exposure to syndicates determines the level of premiums that can be written in a given year and, as a result, underwriting profit potential. The outlook for capacity growth at the end of H122 was limited due to slow working capital generation during the first half. Weak investment returns (which continued during the second half), the steep expected underwriting profile (weighted towards FY23 and FY24) and the impact of the war in Ukraine all contributed to this outlook. In our 29 September 2022 update note, we conservatively forecast capacity of £254.5m at the start of 2023. Subsequent developments have resulted in a large 17% beat relative to this forecast, with the company achieving £296.6m (of which £238.3m was retained capacity, net of reinsurance).

The 27% growth in capacity (39% growth on a retained basis) was possible because of two key developments, namely a successful capital raise in November 2023 and a historically high level of pre-emptions offered to Helios by its syndicates. The £12.5m in gross capital supported Helios’s LLV acquisitions in December 2022, as well as the additional capacity taken on during the Lloyd’s year-end auction.

Historically high level of pre-emptions: £36m

Pre-emptions occur when Helios’s syndicates increase their own capacity levels (usually through acquiring capacity during the Lloyd’s auctions) and then offer Helios the opportunity to participate in this increase. There is no direct cost associated with Helios’s take-up of pre-emptions, although it must provide the regulatory capital or funds at Lloyd’s (FAL) to back this increase in capacity, which affects free working capital. Following three years of pre-emptions averaging £7.5m per year, Helios was offered and took up a historically high level of pre-emptions of £36m by the start of 2023, higher than the £21.7m it expected in September 2022 when it released H122 results. The high pre-emptions offered were thanks to healthy growth for many of Helios’s top-quartile syndicates on the back of a strong pricing environment and market discipline. Pre-emptions contributed 16% to capacity growth over the year and were valued at £12.4m, which will increase Helios’s weighted average value of capacity (WAV) at 31 December 2022, bolstering its balance sheet.

£12.5m capital raised without dilution

On 24 November 2022, Helios announced the successful raise of £12.5m in gross capital at a price of 156p/share, resulting in an 8m increase in shares in issue to 77.7m. The issue price was in line with the market closing price on 22 November 2022 and at a premium to NAV/share of 148.6p on 30 June 2022. Based on our calculations, the price of the raise (above NAV/share) resulted in zero dilution to FY23 earnings. However, it bolstered Helios’s free working capital and its ability to deploy capital into capacity growth.

£38.9m net addition to tenancy capacity

In addition to the £36m that Helios added to its capacity at the start of 2023 through pre-emptions, it increased tenancy capacity by £38.9m net and added £5.7m through LLV acquisitions, offset by a £16.7m reduction as a result of the net disposal of capacity in the Lloyd’s auction.

Unlike normal underwriting capacity, tenancy capacity does not provide a permanent increase in Helios’s capacity and therefore does not allow it to participate in increased premium production for longer than the following 12 months. There is no direct cost associated with Helios’s acquisition of (temporary) tenancy capacity, although it must provide the regulatory capital (FAL) to back this increase in capacity, which affects free working capital. Unlike pre-emption capacity, tenancy capacity is not ascribed a value in the WAV and therefore has no immediate positive impact on Helios’s balance sheet. However, any underwriting profits earned on additional premiums backed by tenancy capacity (specifically in 2023 as it relates to the £38.9m that has been added) would add to earnings and benefit the company’s NAV. All things being equal, the addition of tenancy capacity will enhance Helios’s return on NAV (RONAV), which is demonstrated by our updated forecasts, discussed below.

On 29 December 2022, Helios announced the successful acquisition of three LLVs for a consideration of £5.7m, resulting in a £5.7m increase in capacity. The acquisitions were concluded at an average 11.7% discount to the Humphrey valuation (Humphrey & Co is an established firm that produces valuations on LLVs). These transactions were assumed to be balance sheet neutral with a £2.7m addition to WAV and a £3.0m addition to financial assets, offset by the £5.7m consideration.

On 10 January, Helios released its retained capacity update, which highlighted the 27% increase in gross capacity to £296.6m (39% increase in retained capacity to £238.3m) at the start of 2023. In addition to the pre-emptions, LLV acquisitions and tenancy capacity addition, the company reported a £16.7m net reduction in capacity due to the Lloyd’s capacity auction at the end of 2022.

The large 39% increase in retained capacity has increased Helios’s participation in future underwriting returns, which we forecast to improve strongly in FY23 and thereafter. Exhibit 1 shows the meaningful growth in retained capacity per issued Helios share over recent years and illustrates the company’s effective capital management notwithstanding the large increase in issued shares in FY21 and FY22.

Exhibit 1: Retained capacity increased to £3.1/share

Source: Helios Underwriting, Edison Investment Research

An important enabler of the enhanced capacity at the start of 2023 was Helios’s decision to increase its excess of loss FAL facility (a risk transfer mechanism reducing the FAL that the company has to hold at Lloyd’s) from £6m to £27m at an additional cost of 9% per year, amortised over the first 24 months of an underwriting year. This increased cost was allowed for in our latest forecasts below from FY24.

Improved diversification of portfolio exposure

In recent years, the meaningful increase in Helios’s capacity has been accompanied by active steps to manage and diversify the risks within its syndicate portfolio. The company has actively sought to broaden the portfolio away from natural catastrophe exposure, with large loss exposure reducing by c 5% at the start of 2023 thanks to exits from specific catastrophe syndicates (after a c 4% reduction in the prior year with the addition of Blenheim Syndicate 5886). Helios has also supported a number of new syndicates that bring non-correlated exposure to the portfolio by targeting business not naturally gravitating to Lloyd’s (eg gaining access the non-traditional Acrisure broker network). The company has also sought to enhance its ESG commitment by supporting tech-enabled underwriting opportunities in developing countries (eg the Click for Cover managing general underwriter, offering cyber cover to small businesses).

The improved diversification in its portfolio allows Helios to better manage its risk, to target sustained outperformance against the Lloyd’s market as a whole, which supports our optimistic outlook for profitability and shareholder returns over the coming years.

Financials

Exhibit 2: Helios’s segmental forecasts and key metrics

£m

FY20

FY21

FY22e

FY23e

FY24e

FY25e

Capacity (for deployment in the next year)

110.4

232.8

296.6

329.2

372.0

416.7

Capacity added through acquisitions

10.9

34.9

5.7

17.8

26.3

26.0

Key parent company assets

 

 

 

 

 

 

FAL (required capital)

19.7

43.6

68.4

64.3

59.7

65.5

WAV (intangible assets)

30.8

59.8

61.0

75.1

94.0

113.6

Free working capital

5.0

16.2

18.9

15.6

14.9

11.2

Key syndicate assets

 

 

 

 

 

 

Insurance assets

65.6

110.3

170.1

258.8

310.6

374.6

Equity (members' balances at Lloyd's)

(5.7)

(3.5)

(4.9)

11.9

28.4

34.9

Group NAV (syndicate plus parent equity)

18.9

46.6

58.3

62.6

67.4

70.1

Syndicate-level results*

GWP

76.1

134.6

254.6

327.9

346.0

385.9

Net earned premiums

55.7

92.7

152.4

233.4

246.3

274.7

Claims

(37.9)

(54.1)

(91.8)

(127.5)

(131.2)

(145.0)

Expenses

(19.5)

(32.9)

(47.2)

(78.8)

(84.0)

(93.7)

Underwriting result

(1.7)

5.7

13.4

27.1

31.2

36.0

Investment income on financial assets

2.4

0.0

(6.9)

10.4

14.0

16.6

Quota share reinsurance

(0.1)

(2.3)

(2.8)

(9.5)

(8.6)

(9.2)

Underwriting Operating result

0.6

3.4

3.7

27.9

36.6

43.4

Parent-level results

 

 

 

 

 

 

Reinsurance income**

0.1

0.2

0.9

1.6

2.5

2.6

Investment income on FAL

1.6

1.2

1.0

0.6

1.1

1.6

Stop loss costs

(1.1)

(1.9)

(2.9)

(3.3)

(3.6)

(4.1)

Operating costs

(2.0)

(3.6)

(4.0)

(3.5)

(3.6)

(3.7)

Other***

1.2

(0.1)

0.0

(1.5)

(1.6)

(1.5)

Combined pre-tax profit

0.3

(0.6)

(1.2)

21.9

31.4

38.3

Tax

(0.0)

0.2

0.4

(5.2)

(7.4)

(9.2)

Profit after tax

0.3

(0.4)

(0.9)

16.7

24.0

29.2

WAV revaluation after tax

4.0

5.4

2.0

3.9

4.3

4.9

Total comprehensive income

4.3

4.9

1.2

20.6

28.3

34.0

NAV/share (p)

150.8

157.0

156.6

180.7

211.9

241.1

WAV/share (p)

93.4

88.2

80.1

98.6

123.4

149.0

EPS (p)

1.6

(0.8)

(1.2)

21.8

31.3

38.1

DPS (p)

3.0

3.0

3.0

6.0

15.4

18.8

Capacity growth

59.8%

110.9%

27.4%

11.0%

13.0%

12.0%

EPS growth

(93.8%)

N/A

N/A

N/A

43.3%

21.6%

RONAV/share

1.0%

(0.5%)

(0.8%)

13.7%

17.1%

17.7%

RONAV/share plus WAV revaluations

(4.9%)

5.5%

0.7%

17.3%

20.6%

21.1%

Group insurance ratios****

 

 

 

 

 

 

Claims ratio

69.9%

64.5%

62.6%

57.8%

55.6%

55.0%

Expense ratio

43.0%

43.3%

37.0%

38.7%

38.8%

38.5%

Combined ratio

112.9%

107.8%

99.6%

96.5%

94.4%

93.5%

Underwriting portfolio insurance ratios*****

 

 

 

 

 

 

Claims ratio

68.0%

58.4%

60.2%

54.6%

53.3%

52.8%

Expense ratio

35.0%

35.5%

31.0%

33.8%

34.1%

34.1%

Combined ratio

103.1%

93.9%

91.2%

88.4%

87.3%

86.9%

RoC (closed YOA)

(0.2%)

3.3%

2.3%

9.0%

13.5%

13.5%

Year 3 (accounting year)

4.7%

6.1%

2.5%

7.8%

6.5%

5.7%

Year 2 (previous year)

4.2%

1.3%

4.4%

5.2%

8.9%

7.2%

Year 1 (underwriting year)

(9.0%)

(4.2%)

(4.6%)

(4.0%)

(1.9%)

0.5%

Source: Helios Underwriting, Edison Investment Research. Note: *Syndicate results before pre-acquisition and other parent items and after quota share reinsurance. **Quota share fees & profit commission. ***Goodwill on bargain purchase and pre-acquisition impact. ****Using consolidated premiums (after pre-acquisition impact) and including parent items. *****Using syndicate excluding pre-acquisitions and parent impacts. Syndicate revenue is higher than consolidated revenue, but so are claims and expenses (pre-acquisition impact).

Two factors have weighed on Helios’s FY22 earnings expectations, resulting in a downgrade to our EPS in September 2022 from 7.2p/share to a loss of 1.1p/share. Firstly, weak investment returns on the back of rising yields affected mark-to-market fixed interest portfolios and continued in H222. We considered this in our September 2022 adjustment and made no further change. Secondly, the war in Ukraine affected the 2021 year of account (YOA) underwriting result. Claims expectations have deteriorated somewhat since the half year-end and we have increased our allowance for Ukraine (1% higher claims ratio at 60% for the 2021 YOA) and Hurricane Ian (1.5% higher claims ratio at 69.5%for the 2022 YOA). The net impact is a downgrade in FY22e EPS from a loss of 1.1p/share to a loss of 1.2p/share.

However, much higher capacity at the start of 2023 has resulted in a more optimistic outlook for premiums and underwriting results, as well as free working capital generation. On the back of this, we have increased our forecasts for the underwriting operating result by 20.5% for FY23 and 22.5% for FY24 (compared with a 27% increase in gross capacity and a 39% increase in retained capacity at the start of 2023). Against this, we have allowed for a number of offsetting factors, including:

lower investment income on FAL to allow for the costs associated with a higher level of excess of loss reinsurance (put in place to help fund the capital needs associated with higher capacity levels);

higher stop-loss reinsurance costs on higher retained capacity (costs are set with reference to this metric);

slightly higher operating expenses to allow for potentially higher capacity accumulation activity over the forecast period;

higher pre-acquisition costs to allow for timing differences between the deployment of higher capacity levels by the syndicates; and

the impact of the increased number of shares in issue following the capital raise on per-share results.

The net impact is a broadly unchanged EPS forecast for FY23 (21.8p/share) and a 4% upgrade in FY24 EPS to 31.3p/share. Based on the observed Lloyd’s auction prices, we estimate a healthy increase in WAV over 2022 before revaluation. However, if we take into account elevated average auction prices in 2021 and relatively lower prices in 2022, this is likely to be largely offset by a negative revaluation. We therefore forecast largely flat WAV at £61m at 31 December 2022. As a result of this, as well as the increase in issued shares, our forecast NAV per share has been cut for FY22 to FY24, after which it reverts and surpasses our previous forecast levels with the impact of increased capacity offsetting the larger number of shares in issue. On the back of these forecast changes, we have lifted our forecast RONAV for FY24 from 15.7% to 17.1% (17.7% forecast for FY25), which positively affects our valuation.

Valuation: An over-the-cycle return approach

Our base case valuation of 252p/share uses a 15.9% over-the-cycle RONAV, based on the average return forecast from FY23 to FY25. This is a 5% increase on our previous valuation of 240p/share, supported by a much higher capacity base from which to generate premium revenue and underwriting margin. The increase also benefited from a reduction in cost of equity from 10.5% to 9.8% on the back of lower observed risk-free rates (we are using 3.3% versus 4.0% before).

Exhibit 3: Current valuation

FY20

FY21

FY22e

FY23e

FY24e

FY25e

Over the cycle valuation (p)

252

EPS (p)

1.6

(0.8)

(1.2)

21.8

31.3

38.1

DPS (p)

3.0

3.0

3.0

6.0

15.4

18.8

NAV/share (p)

150.8

157.0

156.6

180.7

211.9

241.1

Valuation-implied P/E (x)

158.4

(334.9)

(201.7)

11.5

8.0

6.6

Valuation-implied dividend yield (%)

1.2

1.2

1.2

2.4

6.1

7.4

NAV multiple (x)

1.65

1.59

1.61

1.39

1.19

1.05

Source: Helios Underwriting, Edison Investment Research

Our fair value for Helios is a 1.39x multiple of its FY23 forecast NAV of 180.7p/share and at a 58% premium to the current share price. The valuation is not well supported by expected FY22 EPS or dividends, but, once the effects of improved underwriting conditions start to emerge from FY23, the forward earnings multiple implied by our valuation is attractive at 11.5x and declines rapidly to 6.6x in FY25. Similarly, the dividend yield becomes more attractive from FY23.

Exhibit 4: Peer group P/NAV and dividend yield comparison

Source: Refinitiv, Helios Underwriting, Edison Investment Research. Note: Priced at 9 February 2023. Helios’s NAV includes WAV at fair value, while NAV of peers does not.

While our valuation for Helios indicates a relative value on an implied forward earnings and NAV multiple basis, the company far underperforms the peer group on dividend yield. This is because Helios chooses to retain most of its earnings to fund capacity growth.

Exhibit 4: Financial summary

2020

2021

2022e

2023e

2024e

2025e

Accounts: IFRS, year-end: 31 December, £’000s

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue*

52,594

70,615

137,605

218,683

232,920

263,820

Net insurance claims and loss adjustment expenses

(51,996)

(70,149)

(136,387)

(195,429)

(200,668)

(224,570)

Gross Profit

598

466

1,219

23,254

32,252

39,250

EBITDA

(924)

(1,864)

(1,557)

20,798

29,735

36,670

Operating profit (before amort. and excepts.)

(924)

(1,864)

(1,557)

20,798

29,735

36,670

Intangible Amortisation

0

0

0

0

0

0

Exceptionals

1,260

1,219

315

1 136

1,682

1,663

Other

(1,522)

(2,330)

(2,775)

(2,456)

(2,517)

(2,580)

Operating Profit

336

(645)

(1 241)

21,935

31,416

38,333

Net Interest

Profit Before Tax (norm)

(924)

(1,864)

(1,557)

20,798

29,735

36,670

Profit Before Tax (FRS 3)

336

(645)

(1,241)

21,935

31,416

38,333

Tax

(35)

211

389

(5,200)

(7,434)

(9,167)

Profit After Tax (norm)

(959)

(1,653)

(1,167)

15,599

22,301

27,502

Profit After Tax (FRS 3)

301

(434)

(852)

16,735

23,983

29,165

Average Number of Shares Outstanding (m)

25.3

50.4

72.0

76.2

76.2

76.2

EPS - normalised (p)

1.6

(0.8)

(1.2)

21.8

31.3

38.1

EPS - normalised fully diluted (p)

1.6

(0.7)

(1.2)

21.5

30.9

37.5

EPS - (IFRS) (p)

1.6

(0.7)

(1.2)

21.5

30.9

37.5

Dividend per share (p)

3.0

3.0

3.0

6.0

15.4

18.8

Gross Margin (%)

1.1%

0.7%

0.9%

10.6%

13.8%

14.9%

EBITDA Margin (%)

(1.8%)

(2.6%)

(1.1%)

9.5%

12.8%

13.9%

Operating Margin (before GW and except.) (%)

(1.8%)

(2.6%)

(1.1%)

9.5%

12.8%

13.9%

BALANCE SHEET

Fixed Assets

220,937

380,720

574,703

742,491

816,838

942,443

Intangible Assets

31,601

60,890

60,990

75,082

94,018

113,554

Tangible Assets

104,059

165,986

275,219

344,283

352,604

388,796

Investments

85,277

153,844

238,493

323,126

370,216

440,093

Current Assets

8,495

24,624

26,527

27,664

29,550

29,122

Stocks

0

0

0

0

0

0

Debtors

0

0

0

0

0

0

Cash

8,495

24,624

26,527

27,664

29,550

29,122

Other

0

0

0

0

0

0

Current Liabilities

7,293

4,699

20,169

20,686

21,254

21,880

Creditors

3,293

4,699

5,169

5,686

6,254

6,880

Short term borrowings

4,000

0

15,000

15,000

15,000

15,000

Long Term Liabilities

171,590

293,156

461,728

611,792

663,723

765,983

Long term borrowings

0

0

0

0

0

0

Other long-term liabilities

171,590

293,156

461,728

611,792

663,723

765,983

Net Assets

50,549

107,489

119,333

137,676

161,410

183,703

CASH FLOW

Operating Cash Flow

(11,629)

(16,350)

(25,505)

24,150

36,874

43,219

Net Interest

(1,474)

(1,566)

4,347

(5,186)

(7,995)

(9,753)

Tax

(312)

(675)

389

(5,200)

(7,434)

(9,167)

Capex

(186)

(2,983)

5056

0

,0

,0

Acquisitions/disposals

2,889

(9,880)

(8,068)

(10,342)

(14,986)

(12,970)

Financing

13,170

49,601

27,719

0

0

0

Dividends

0

(2,018)

(2,034)

(2,286)

(4,571)

(11,757)

Net Cash Flow

2,458

16,129

1 903

1,136

1,887

(429)

Opening net debt/(cash)

4,037

4,495

24,624

11,527

12,664

14,550

HP finance leases initiated

0

0

0

0

0

0

Change in borrowings

(2,000)

4,000

(15,000)

0

0

0

Closing net debt/(cash)

4,495

24,624

11,527

12,664

14,550

14,122

Source: Helios Underwriting, Edison Investment Research. Note: *Shown after pre-acquisition impact and parent reinsurance result, investment income, costs and other items (see Exhibit 2 for a segmental view of syndicate result and parent result).


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Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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United Kingdom

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Helios Underwriting and prepared and issued by Edison, in consideration of a fee payable by Helios Underwriting. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Research: Industrials

paragon — Risk reduction should relieve the equity rating

paragon appears to be progressively de-risking its investment proposition. The agreed sale of Semvox crystallises an enterprise value (EV) that highlights the depressed market cap due to the debt burden. The accelerated redemption of the entire Swiss franc (CHF) bond issue and half the Eurobond reduces debt metrics to typical industrial levels, and we expect improving cash flows to facilitate final redemption in 2027. The result is an apparently anomalous rating for paragon compared to its estimated cash valuations and peers. Assuming the disposal completes and the bonds are redeemed as anticipated, the crushed equity value of recent years should finally be relieved.

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