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M&G - coronavirus disruption hits profit, but dividend intact

Nicholas Hyett, Equity Analyst | 12 August 2020 | A A A
M&G - coronavirus disruption hits profit, but dividend intact

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M&G plc ORD GBP0.05

Sell: 199.10 | Buy: 199.25 | Change 5.10 (2.64%)
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Underlying operating profits in the first half fell 56.7% to £309m. That reflects lower profits in the annuities and asset management businesses, as well as higher cost in the corporate centre following the demerger from Prudential.

The group announced an interim dividend of 6.00p per share.

The shares rose 1.8% in early trading.

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Our view

Following the demerger from Prudential, M&G is made up primarily of M&G asset management and Prudential's UK life insurance business.

However, the group is hoping to pass on a lot of its legacy UK life liabilities to Rothesay Life. If successful that would leave it managing the assets without taking on the risks inherent in life insurance. That's a potentially attractive place to be, because compared to life insurance, asset management is a capital light business.

Insurers have obligations to their customers and meet those by investing the premiums they receive. But as there's always a risk the investment doesn't generate the level of return expected, regulators insist insurers hold a certain amount of capital to meet obligations. Shareholder money is essentially tied up doing not a great deal.

For an asset manager, it's the client taking the investment risk, so regulatory rules are less stringent. That frees up cash, which can be returned to shareholders or invested to fund new growth.

Combining conventional fund management with legacy life insurance and a growing 'with-profits' funds business has given the group scale with £339bn of assets under management and administration (AUMA). And in fund management scale is key - once the costs of running a fund are covered all the extra management fees are profit.

It's not all plain sailing though. The rise of low cost passive investing has made investors increasingly price sensitive, and active management fees are under pressure as a result. The PruFunds line of with-profits funds is selling well, but the product gets treated with suspicion by many UK investors and the UK is a relatively mature market in any case. Growth in AUM could be hard to come by, and revenue growth even more so.

We suspect that's one of the reasons M&G has gone shopping. The purchase of Royal London's platform business adds a relatively small sum to AUM today, but it also provides access to 1,500 advisory firms and over 90,000 retail customers. If it can funnel assets from these customers into M&G or PruFund products that could support revenue growth for years to come.

However, as we've seen this half, that's by no means guaranteed. Retail investors have withdrawn assets in the face of the economic uncertainty caused by coronavirus. Meanwhile falling asset valuations mean the group's Solvency II Ratio (a key measure of its capitalisation) is dropping. The indicators are far from flashing red, but should be watched.

All-in-all the short-term looks challenging. While conditions should stabilise in time we struggle to see how revenue can really accelerate from here. The shares currently offer a 10.3% prospective yield, which suggests we aren't alone in thinking growth, or even maintaining the status quo, could be a struggle.

M&G key facts

  • Price/Earnings ratio: 8.0
  • Average Price/Earnings ratio since listing: 7.2
  • Prospective yield: 10.3

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year Results

M&G's Savings and Asset Management division reported net outflows in the first six months of the year of £4.1bn. That was driven entirely by a £7.7bn outflow in Retail Asset Management, as clients withdrew funds in the face of economic volatility. Outflows slowed in the second quarter. Total assets under management and administration fell 3.7% to £208bn.

The division reported operating income of £565m, down from £619m, reflecting fees on a smaller pool of assets and margin pressure in retail asset management. Together with a modest increase in costs that meant divisional operating profits fell 38.2% to £162m.

The Heritage business, which includes the group's closed products, saw operating profits fall 37.4% to £298m. That was driven by a weaker result from annuities, as lower bond yields reduced returns on excess assets and longevity releases fell.

M&G believes it remains on course to deliver £145m of annualised cost savings by 2022. The group has delayed certain elements of the cost saving plan due to the coronavirus outbreak.

The group finished the half with a Solvency II ratio of 164% - which it described as comfortably within its risk appetite despite having declined slightly as internally generated capital was more than offset by market movements.

The group remains committed to its target of generating £2.2bn of capital over three years.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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 for more information.