Mandatum Q3'24: Hopping back on board

Translation: Original published in Finnish on 11/13/2024 at 8:30 am EET.

Mandatum published a Q3 report that was slightly below our expectations in terms of earnings figures. The miss was due to quarter-on-quarter volatility in investment performance, and the Group's growth engine, the capital-light businesses, performed well ahead of our expectations. While the strong performance has raised the outlook for these businesses, our EBIT forecasts for the coming years have been slightly lowered due to the lower investment performance forecast. On the other hand, Mandatum’s valuation has become attractive following the share price decline, so we raise our recommendation to Accumulate and reiterate our target price of EUR 4.5.

Sales still performing well in seasonally slower quarter

In Q3, the year continued strongly in the capital-light businesses. New sales of asset management, the Group's main source of growth, again performed well in a seasonally slower quarter, supported by improved cost efficiency. Life insurance results were also better than expected. The investment result was lower than expected, and the Group's other result was more negative than forecast, mainly due to non-recurring charges. These factors overshadowed the strong performance of the capital-light businesses, and the result that Mandatum's consolidated result ultimately fell short of our forecast. However, the takeaway from the earnings day is skewed to the positive side, as the forecast was mainly driven by quarterly fluctuations in investment income. The main reason for the lower-than-expected investment return was the deferred change in insurance liabilities due to the sharp decline in market interest rates.

We slightly lowered investment portfolio return forecasts

We have raised our forecasts for Mandatum's capital-light businesses due to improved cost efficiencies in asset management and a stronger performance in risk life insurance. However, due to investment income forecast revisions, our EBIT forecasts for the coming years were lowered by 3-5%. At the same time, we raised our profit distribution forecasts for the coming years slightly in line with Mandatum's increased payout capacity.

In our forecasts, the asset management result will continue to grow clearly, but the Group result will decline in the coming years as the decline in the interest rate base hits 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 has turned attractive

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 relies, somewhat exceptionally, to a large extent on a high dividend yield, as earnings will continue to decline structurally for several years to come. The value of the Mandatum share according to our dividend model, which takes into account our planned distribution and the additional capital on the balance sheet, is around EUR 4.6 (was EUR 4.5). The small increase is explained by higher dividend payout forecasts since the previous update. Our dividend model indicates that the stock is already moderately priced, so after the fall in the share price, the expected return has risen again to an attractive level.