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M&G - profits fall, but beat expectations

First half underlying operating income was broadly flat at £881m, a fall in Asset Management was offset by an increase in Retail and Savings.

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First half underlying operating income was broadly flat at £881m, a fall in Asset Management was offset by an increase in Retail and Savings. Underlying operating profit fell from £327m to £182m, beating expectations and driven by higher costs and a lower value bond investments due to currency movements.

John Foley, CEO, said: "The current macro-economic environment is creating uncertainty in the markets in which we operate."

The group declared an interim dividend of 6.2p per share, in line with the policy of paying one-third of the previous year's total dividend.

The shares rose 1.9% following the announcement.

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Our View

M&G is made up of two main business, M&G asset management and a closed book of UK annuities (meaning it's not selling any new annuities).

The transfer of legacy annuities to Rothesay Life is a big milestone. Such a move allows it to realise a good chunk of future profits associated with the business up front, and 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 they meet those by investing the premiums they receive. But as there's always a risk the investment doesn't generate the return expected, regulators insist insurers hold a certain amount of capital in reserve. Shareholder money is essentially tied up doing not a great deal.

For an asset manager, it's the client taking the investment risk. The fund manager hasn't made any promises about the level of return on offer, and if the investments perform poorly it's the end client that ultimately takes the hit. As a result, regulatory rules are less stringent. That helps free up cash, which can be returned to shareholders or invested to fund new growth.

That's important because future growth is going to be crucial to M&G's long-term success.

The rise of low-cost passive investing has made investors increasingly price sensitive, and active management fees are under pressure. That puts pressure on revenue. The obvious way to offset that headwind is by growing the group's assets under management or administration (AUMA), and that's why asset management is increasingly all about scale. The larger fund managers can afford to charge lower fees, helping them compete with passive alternatives, attracting new money and kick starting a virtuous circle.

With AUMA around £350bn, M&G is big, but not a giant in asset management terms. The PruFunds line of with-profits funds has been 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 AUMA could be hard to come by, and revenue growth even more so.

That adds weight to the evolution of the M&G Wealth platform. The idea is to offer advisers an all-in-one platform, funnelling assets from customers into M&G or PruFund products. If successful, that could support revenue growth for years to come.

However, that's by no means guaranteed. In 2020 Retail investors withdrew assets in the face of the economic uncertainty caused by coronavirus. Impressive results and a focus on offering sustainable funds has seen that trend reverse, with a net inflow recorded for the half. That is undoubtedly a step in the right direction, but we would like to see the trend continue - and with current market uncertainty at fever pitch, this may be difficult.

The group's surplus capital should mean it's hopefully able to sustain the dividend, although of course nothing is ever guaranteed. Investors may well look at the prospective yield, which is currently pushing double digit territory, and think the shares have been unfairly neglected. We have some sympathy with that view, even if long-term growth prospects are less rosy.

M&G key facts

All ratios are sourced from Refinitiv. 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.

Half Year Results

The Asset Management division saw Assets Under Management (AUM) fell from £156.7bn to £153.8b, as negative market movements were only partially offset by net inflows of £1.1bn. Institutional inflows decreased as client behaviour was impacted by volatile market, with wholesale posting inflows for the first time since 2018. Underling operating profit fell from £147m to £124m, as costs rose due to inflation and investment.

Retail & Savings operating income fell from £422m to £378m, driven by a large fall in annuity margin which reflects the difference between assets and liabilities in the annuity portfolio. That was partly offset by an increase in fee-based revenues, with revenue recognised for Sandringham for the first time, and an increase in return from the with-profits business. Underlying operating profit fell £70m to £226m.

Shareholder Solvency II ratio improved from 198% last year to 214%. Total capital generation fell to £24m, from £869m as a result of increasing yields and falling equity markets.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 disclosure for more information.

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Written by
Matt Britzman
Senior Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 11th August 2022