Sampo announced on Monday that it has signed the long-awaited merger agreement with Topdanmark, which will increase its holding in the company to 100% from the previous 48.9%.  In practice, Sampo acquires Topdanmark and merges its P&C insurance business into If. We consider the merger likely to be approved, so we have included its estimated impact in our forecasts. Although we are positive about the arrangement, its significance in the Group’s value remains moderate. We revise our target price to EUR 40 (was EUR 39) and reiterate our Reduce recommendation as the stock's valuation is neutral.

The rationale for the merger can be found in synergies

The merger strengthens Sampo’s position as the leading P&C insurance provider in the Nordic countries and enables significant cost synergies, e.g., in IT systems, as Topdanmark’s P&C insurance business is integrated into If’s Nordic organization. At the same time, the stalemate in Topdanmark’s ownership is finally resolved and the focus can shift to the continuous development of the Group’s P&C insurance operations. Sampo also announced an 800 MEUR share buyback program to reduce the dilution effect on its share capital from the increase in the number of shares resulting from the combination. The combination is planned to be carried out through a share exchange, where Topdanmark's value per share is DKK 366.38, which means a premium of some 27% on Friday’s closing price. The P/E ratio, which considers non-recurring costs in the acquisition price, will thus be around 14x with 2025 earnings forecasts. This level can be considered justified from the perspective of Sampo’s shareholders, as we accept a P/E ratio of 15-17x for Sampo.

The potential of the merger will become visible in earnings with a delay

Our EPS forecasts for the next few years have decreased slightly as a result of the growing number of shares. The synergy benefits of the merger only become visible with a delay, so our long-term earnings forecasts have risen correspondingly. As a whole, our view on Sampo's performance has remained almost unchanged and we estimate that the company's normal earnings under the current structure is around EUR 2.4-2.6 per share The level should be growing steadily, driven by operating profit growth but larger level adjustments should not be expected given the current excellent performance of the businesses.

The stock is correctly priced

In our valuation, our focus is particularly on the dividend model, as the investment needs of the business are low and Sampo can distribute most of its earnings to its shareholders. The acquisition of the remaining share of Topdanmark did not change the valuation picture materially, as even if the offered price can be justified by cost synergies alone, the positive impact of the arrangement on the Group's scale is quite limited, as If’s weight is still dominating. In addition, a substantial part of the synergy potential will be paid as a premium to Topdanmark shareholders.   Our view of Sampo’s value has remained almost unchanged, but the acquisition of Topdanmark’s minority interests had a small positive impact on this. Sampo's value is supported by its low investment rate and moderate risk level. In a mature industry, growth opportunities are limited, which lowers the acceptable valuation level. As a whole, we consider the stock to be correctly priced and believe that a better expected return would require faster earnings growth than we expect, now that significant new acquisitions are quite unlikely after the acquisition of the remaining shares in Topdanmark.