Mandatum Q2'24: Best of expected return behind

This report is a summary translation of the report “Tuotto-odotuksen paras terä on takana” published on 8/14/2024 at 8:45 pm EEST.

Mandatum published Q2 figures that were significantly better than our expectations. The earnings beat was mainly driven by investment performance, but the capital-light businesses also performed better than expected. Based on the Q2 report, we have raised our earnings forecasts for the coming years. However, we see that the best of the stock's expected returns have been left behind by the recent rise in the share price, so we downgrade our recommendation to Reduce (was Accumulate) and reiterate our target price of EUR 4.5.

Q2 result was clearly better than our estimates

The year continued strongly in the capital-light businesses. New sales in Mandatum's most important source of growth, Wealth management, developed very well with net cash flows of almost 232 MEUR (1.9% of AUM) in Q2. The vast majority of sales were again to institutional and wealth management clients. As in the early part of the year, interest rate products were the best-selling products. The quarter was also better than expected on the profit side, with all profit lines in the capital-light businesses beating our forecasts due to favorable cost developments. However, the largest variance was in the investment result, which accounts for most of the group's overperformance. The solvency ratio remained well above the company's target level, meaning that there is a significant amount of excess capital on the balance sheet. The amount of excess capital will continue to grow as Mandatum exits its balance sheet investments in line with its strategy over the coming years.

Good start to the year raises earnings forecasts

Our fee result and risk life forecasts have been raised as a result of the strong profit and expense development in the first half of the year. In turn, our investment return forecasts have been lowered to reflect our updated estimates of the impact of falling interest rates on earnings. Overall, we increased our forecast for Mandatum's pre-tax profit by 10% for the current year and by 1-2% for the coming years.

We expect the Wealth management result to continue to grow significantly, but to decline in the coming years as the declining with-profit portfolio and falling interest rates erode the return on the investment portfolio. Overall, we expect Mandatum's pre-tax profit to peak this year and gradually decline thereafter. Based on our current estimates, it will not be until closer to the turn of the decade that the growth in wealth management will offset the impact on earnings of lower interest rates and a shrinking with-profit portfolio.

Expected return is no longer sufficient

We have gauged Mandatum 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 is, somewhat unusually, heavily dependent on a high dividend yield, as earnings will structurally decline for several years to come and maintaining earnings at current levels would be an excellent performance in the coming years. The value of the Mandatum share in our dividend model, which takes into account our forecast distribution and the excess capital on the balance sheet, remains unchanged at EUR 4.5 despite the dividend payout. This is due to higher dividend payout forecasts since the last update. However, we see the best of the stock's expected returns being left behind as the price rises.