Prudential plc (PRU) Ordinary 5p
HL comment (9 March 2022)
Underlying operating profits from continuing operations, which are focused on Asia and Africa following the Jackson demerger, rose 16% to $3.2bn. That reflects a more lucrative mix of products and a strong insurance performance in 71% of markets. Funds under management at Eastspring also rose, helping profits.
Performance is still being held back by the Mainland China border closure in Hong Kong. While the group's confident in its long-term strategy, it said ''the timing of the opening of the Hong Kong border remains uncertain and Covid-19 will continue to have an impact. The current conflict in Ukraine could have wider implications for global economic and market conditions as well as geopolitical relations''.
A second interim dividend of 11.86 cents per share was announced, taking the full year payment to 17.23 cents.
CEO, Mike Wells, will step down at the end of March 2022.
The shares rose 5.8% following the announcement.
Following the demerger of the US business, Prudential is now solely focussed on Asia and Africa.
Overall, full year results painted a bright picture. Eight key markets, including mainland China saw sales rise by double digits. Together with a pivot towards higher margin (read: more lucrative) products in Hong Kong and Singapore, means new business profit - which looks at predicted earnings on newly sold products - was better than analysts had expected.
Margins are also getting some TLC from management. Prudential is targeting savings through increased digitisation. Digital customers are cheaper to recruit and cheaper to serve, boosting margins or making product pricing more competitive - both ultimately good news for the bottom line.
Looking further ahead, the Asian business should benefit from long term economic development in its markets, driving increased demand for Pru's insurance products - since in many cases state sponsored social security has never got off the ground. A focus on regular premium products like life and health insurance should also make profits reasonably dependable.
However, in the shorter term there are some challenges to consider. Sales volumes in Hong Kong - where Prudential has a dual headquarters with London- are struggling. This is largely because of the ongoing coronavirus wave, but there are also challenges arising from the closure of the border with Mainland China. The weaker trading is deemed to be a short-term problem, but it's one we'd like to see unwinding sooner rather than later. From both an operational and reputational perspective, Hong Kong is an important region.
The lack of clarity on the incoming CEO is disappointing. Transition risk at a beast as big and complex as Prudential is always high, so further guidance on who the new person at the top will be would be very welcome.
The focus on growing the Asian business also limits shareholder returns for now, with the prospective dividend yield of under 1.5% unlikely to be cause for celebration.
We have no qualms over Prudential's financial wellbeing, helped by the $2.4bn equity raise in the final quarter of the financial year. This has gone on reducing debt, and while some were likely disappointed by the scale of the fundraising, we deem it a good move.
The current price to earnings ratio is in-line with the ten year average, which could be deemed undemanding when you consider Pru's leaner structure and real growth opportunities. Investors should keep in mind though that the medium term looks a little unclear and a low dividend yield means patience isn't likely to be too richly rewarded.
Prudential key facts
- Price/earnings ratio: 10.9
- 10 year average Price/Book ratio: 10.1
- Prospective dividend yield (next 12 months): 1.4%
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.
Full Year Results (Constant Exchange Rates)
Life insurance new business sales in Asia and Africa rose 8% to $4.2bn. Eight markets saw double-digit growth including Mainland China, India, Malaysia, the Philippines, Singapore and Thailand. Excluding Hong Kong, sales were up 16%. Higher sales and a more lucrative mix of products meant new business profit rose 13% to $2.2bn overall.
Asian asset manager Eastspring saw assets under management rise 7% to $258.5bn, while operating profits were up 10% at $314m. There was a net inflow of $5.8bn, helped by internal flows from the life insurance business.
The group's net operating free surplus, a key measure of cash generation, rose 26% to $1.2bn. That reflects higher capital generation from the life insurance and asset management businesses, partially offset by higher costs.
The group's GWS capital position, capital requirements set by the Hong Kong regulator, was reflected in a coverage ratio of 414%.
The group said: ''In the near term, our corporate activity is expected to include the reduction of our stake in Jackson to less than 10 per cent and the securing of additional central cost savings of $70 million from the start of 2023''.
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 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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