On 28th Jan Prudential announced a change of plan for the separation of the US business and capital management for the Group. This note explains the negative implications for valuation. We also take the opportunity to look again at the go-forward equity story, addressing the feedback we''ve received on our Underperform recommendation.
What just happened?
On 28th Jan Pru announced a) a c.80ppt downwards adjustment of the US capital position, leading to the cancellation of its pre-separation remittance (est. USD2bn); b) a switch from IPO to demerger for the US separation; and c) a USD2.5-3bn potential equity raise at Group to accelerate deleveraging. This note examines the negative impact of these announcements on valuation. On the plus side, the US separation will now complete quicker than expected.
Asia and Hong Kong: debating growth potential and balance sheet resilience
The route to separation has changed, but the end goal is the same. We take this opportunity to revisit our views on the go-forward Asian business and address investor pushback. Our most controversial position was that there are long-term headwinds to the growth in Mainland Chinese tourist business in Hong Kong. Several investors pushed-back on the idea that political reforms might put off customers. But others actually suggested that we might have underplayed another headwind: the potential for COVID to cause a long-term impairment to new business. Few investors had examined the balance sheet exposure for the go-forward business: the relatively high leverage we identified seems to be a driver of the plan to potentially raise equity to pay down debt.
Jackson and the ''sum-of-the-parts'' thesis: is the demerger actually a catalyst?
There remains a view amongst some investors that the separation of Jackson will catalyse the closing of a discount to peers. But our conversations suggest scepticism amongst investors on this point - in part due to bitter experience with other...
