Prudential the company looks to be doing very well. Prudential the stock has been having a harder time of late, underperforming the broader market by around 10% since mid-March. Some of that could be valuation. In our last View, we highlighted that whilst Prudential’s long term prospects looked bright, the shares were about as highly rated, in terms of price/book and price/earnings as they had ever been. So perhaps the shares have been struggling to find enough oxygen, up on their lofty peak?
But perhaps also, there has been another factor at work? Pru@s Asian business has been a spectacular success story in the last twenty years, and the proportion of group profits coming from Asia has grown to around a third. Recently, we have seen fears of a slower Chinese economy. Pru has little direct exposure to China, but when the tiger sneezes, the rest of the region is going to catch a cold. Emerging market currencies have also been weak, and with operations in nations like Indonesia and Thailand, Pru will see the sterling value of profits in those nations hit, when converted back to sterling.
Underneath it all, Prudential remains a great story, with the majority of income coming from Asia and the USA. Both regions have huge longer term potential and Prudential is well positioned in each. The valuation has improved with the underperformance, though please remember past performance is not a guide to future returns. Having been almost 40% above its longer term average PE, that premium has now halved. In terms of price to book, however, the valuation remains elevated. So, the long term looks bright, but in the short-term, Prudential is highly valued versus history, with a few worries over the direction of China and Asian currencies. Why not take a closer look, in about a year or two’s time?
- Asia life and asset management IFRS operating profit of £632 million, up 17 per cent.
- Jackson life IFRS operating profit of £834 million, up 11 per cent.
- UK life IFRS operating profit of £436 million, up 19 per cent.
- M&G IFRS operating profit of £251 million, up 11 per cent.
- IFRS shareholders' funds of £12.1 billion, up 14 per cent.
- EEV shareholders' funds of £30.1 billion, up 16 per cent, equivalent to 1,170 pence per share.
- Insurance Groups Directive capital surplus estimated at £5.2 billion; solvency requirements covered 2.5 times.
At home, Prudential managed a 25% increase in retail sales (Annual Premium Equivalent basis), despite the fall in retail annuities, after the requirement to purchase them was dropped in the 2014 Budget.
In Asia, the continuing growth in middle classes is driving the Prudential's businesses, through their own direct salesforces and through bancassurance relationships in the region.
Jackson Life in the US is carefully balancing its mix of sales to ensure effective management of capital, because the sale of variable annuities, with living benefits, can be very capital-hungry. Prudential describe their recent annuity inflows as having attractive margins, which contributed to a record £834m H1 operating profit from the division.
Prudential expect to hear the outcome of their submission of Solvency II capital plans in December, alongside other industry players. The new CEO, Mike Wells, who replaced Tidjane Thiam in early June, has confirmed that Group Strategy is sound and will continue as planned.
Commenting on the outlook, Mr Wells said:
"Looking ahead, despite ongoing macro-economic uncertainties, we are confident that our proven strategy, strong execution and the quality of our people will continue to deliver great products and service to our 25 million customers and relative outperformance to our shareholders."
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