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Prudential reports 13% profit growth

Charles Huggins | 10 November 2015 | A A A
Prudential reports 13% profit growth

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Prudential plc Ordinary 5p

Sell: 1,078.00 | Buy: 1,078.50 | Change 4.50 (0.42%)
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Prudential has continued to make good progress in the third quarter, with new business profit for the first nine months of 2015 up 13% to £1,764 million at constant exchange rates (up 17% at actual exchange rates). This performance reflects strong growth in Asia and UK life and continued new business discipline in the US. Pru remain "optimistic" about the outlook, particularly in Asia. The shares fell by 1% in early morning trading.

Business review (9 month, constant currency):

Asia: new business profit increased to £976m, up 24%, reflecting 27% growth in APE (Annual Premium Equivalent) sales to £2,021m. The Pru's Asian asset manager, Eastspring, continued to generate positive net flows in Q3, despite volatility in many of its major markets, contributing to 18% growth in total funds under management.

USA: separate account assets, which are a key driver in determining the group's ability to generate earnings and cash, were 4% higher year-on-year at £84.1 billion. Jackson Life new business profit declined by 4% to £557m.

UK life: new business profit increased by 16% to £231m. In the retail business, APE sales were 26% higher, driven by strong growth in the with-profits proposition. The group completed two bulk annuity deals in Q3, taking the year-to-date total to four.

Asset management: Total net outflows in the first nine months of £5.0bn contributed to a decline of 5% in M&G's third party funds under management to £127.3bn at 30 September 2015.

Outlook:

The Pru says that it benefits from high quality recurring income which is helping it to withstand uncertain economic conditions. This is particularly evident in Asia where demand for long-term, regular premium protection and savings products is underpinned by a fast growing but under-insured middle class population. In the US and UK, the Pru continues to prioritise earnings and cash.

The group commented: "Our businesses are in good shape, our balance sheet remains strong and conservatively positioned and we are confident of being able to deliver strong, profitable growth while providing high quality products and services to a rapidly growing customer base."

Our view:

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 could 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. 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.

While the valuation has come down from its March 2015 peak, it remains some way above its longer term average on a price to earnings and price to book basis . 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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.