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Prudential - Asia still driving growth

Nicholas Hyett | 10 August 2016 | A A A
Prudential - Asia still driving growth

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Prudential plc Ordinary 5p

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Prudential delivered first half Group operating profits of £2,059m, up 6%, with new business profit in the life divisions up 8% to £1,260m (all figures at constant exchange rates). Underlying cash generation improved by 10% with cash remittances from business units up 5%. The dividend increases 5% to 12.93p.

Highlights (CER):

  • Asia: Operating profits increased 15% to £743m, driven by 17% growth in the life business and 2% growth in Eastspring, the Asia focussed investment management business. Underlying cash remittances rose 19% to £258m
  • US: Operating profits were down 3% at £8768m. Life new business fell sharply, with sales down 14% to £782m. Cash remittances to group fell 16% to £339m
  • UK: Operating profits rose 9% to £492. Life new business sales increased 51% to £593m. Cash remitted to group by the UK life business grew 7% to £215m, with restructuring contributing an additional one-off £131m remittance
  • M&G: Net outflows in the half were £6,966m with total assets under management 3% lower than a year earlier. IFRS profits are down down 10% to £225m as a result. Despite an 8% fall in expenses the cost:income ratio moved up 1 percentage point to 52%, and is expected to be toward 60% for the full year


The group Solvency II ratio fell to 175% with a surplus estimated at £9.1bn (FY15: 193% and £9.7bn respectively) as market volatility took effect.

Outlook:

The group expects the macro-economic environment to remain challenging and unpredictable in the short term. However it continues to believe that "the compelling structural growth fundamentals in Asia" and "distinctive skills and capabilities" of businesses across the group will allow it to "adapt to market conditions and deliver robust earnings and shareholder value"

Our view:

Pru's Asian business has been a spectacular success story in the last twenty years, and now accounts for over a third of group profits. The economic slowdown in South East Asia earlier this year had little impact; and the outlook remains favourable. This speaks volumes of the quality of Pru's Asian franchise.

A focus on regular premium, protection policies such as health and life insurance lends resilience to Pru's Asian business, because most people continue paying their monthly premiums, even if the economy turns down. South East Asia also benefits from favourable demographics. State provision of safety nets such as healthcare is very low and demand for insurance from the burgeoning middle classes is growing rapidly. The Pru has one of the largest sales forces in the region, and a top three position in 8 out of 13 markets; which confers a major competitive advantage.

The remaining two thirds of Pru's profits come from the UK and USA; which includes asset management (M&G), retirement products and insurance. In recent years these businesses have been benefitting from ageing populations and the retirement of the baby boomers. However, profits in the US retirement business and M&G, in particular, are closely linked to stock markets and the economy more generally. Both have struggled this half, with the US business also hit by uncertainty surrounding new regulation.

The shares currently trade on a price to book ratio of 2.3x, a slight discount to the long run average of nearer 2.4x. The prospective yield for the current year is 3%. While a slowing global economy and volatile stock markets create potential headwinds for Pru's UK and US businesses, long term prospects ought to be supported by the favourable demographic trends; particularly in Asia.

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.