Mandatum Q1'25: Valuation is the only problem

Translation: Original published in Finnish on 05/08/2025 at 09:21 pm EEST

Sales of wealth management solutions, which are key to Mandatum's value creation, remained strong, and the earnings of capital-light businesses continued to grow clearly. Our earnings estimates for the next few years remained almost unchanged, but thanks to the increase in longer-term earnings estimates for wealth management, we revise our target price to EUR 5.6 (was EUR 5.4) in line with our dividend model. In light of this, the stock appears expensive and the expected return is modest, so we reiterate our Reduce recommendation.

Continued strong development in capital-light businesses

The Q1 report was well in line wth our expectations. While there were anomalies at the segment level, the effects of these anomalies eventually offset each other. The Group's key indicators – net cash flow and the cost-to-income ratio of wealth management– developed very strongly, so the takeaway from the earnings day was skewed to the positive side. However, assets under management grew slightly more moderately than we expected, which was purely due to negative value changes.

The main focus of sales was again on international institutional clients and credit products. Net subscriptions in corporate clients' personnel funds also developed strongly. In Q1, Mandatum raised a total of 256 MEUR in new client assets, corresponding to an increase of 1.8% compared to the capital at the end of the previous quarter. As a result, the company is already ahead of its 5% annual new sales target after Q1.

Estimate changes were minor

We have slightly raised our fee result forecasts after strong development. Our new sales forecasts are unchanged, but our estimate of the cost efficiency of the wealth management business has again increased slightly. At the same time, we slightly increased our group costs forecasts. As a combined effect of these, our forecasts for Mandatum's pre-tax profit for the coming years remained practically unchanged, while our earnings forecast for this year increased by approximately 4%.

We expect Mandatum's profit before taxes to have peaked for the time being and to decline moderately in the coming years. In our estimates, wealth management earnings will continue to grow strongly, but the decline in the with-profit portfolio will gradually reduce net financial income. With our estimates, growth in wealth management will only compensate for the earnings impact of the decline in the with-profit portfolio at the turn of the decade.

Profit distribution continues to be generous, although at a much more moderate level than in the financial year just ended. We estimate that the company will distribute all accumulated organic capital, which consists of earnings, as well as capital released from the with-profit portfolio. We have not yet included the additional capital created by the divestment of PE investments in our dividend estimates, as there is uncertainty regarding the use of the capital received from these. These will ultimately be distributed either as extra dividends or used for acquisitions as part of the consolidation of the Finnish asset management sector.

Valuation has taken an unnecessarily large head start

We gauge the value of Mandatum first and foremost by using the dividend model as it best reflects the company's high payout ratio and the unwinding of its overcapitalized balance sheet. Mandatum's expected return relies, somewhat exceptionally, to a large extent on a high dividend yield (6-7% in the coming years), as earnings will continue to decline structurally for several years to come. The value of Mandatum's stock according to our dividend model, which considers the earnings generated by the business and the additional capital on the balance sheet, is around EUR 5.6 (was EUR 5.4). The increase since our previous update is explained by the higher long-term earnings forecasts for the capital-light businesses. Our dividend discount model indicates that the stock is already fully priced, so at the current share price level, the expected return remains insufficient.