Congratulations on your appointment as CEO of Prudential in February. We take the liberty of setting out in this note what we see as the main opportunities to improve shareholder value.
Context: A high growth, high profitability business with a TSR problem
Pru''s TSR has disappointed over the past 10 years - with the separation of the US and European businesses apparently acting as a negative, rather than positive catalyst. Some investors see the biggest upside from helping the market understand the discount to peers. But we don''t think it is at a discount. To maximise TSR, the real job ahead is actually improving the economics of the business.
Recommendation 1: boost the wealth and savings proposition
Pru''s major competitive advantage lies in its distribution capabilities. The Group currently tilts towards Regular Premium products with a Health and Protection component. But we see an opportunity to use the Group''s distribution power to improve share in the savings segment - potentially taking Prudential further into the Wealth Management space.
Recommendation 2: align the EEV methodology with a real-world cost of capital
Management is heavily incentivised to boost EEV NBP. But the EEV methodology favours HandP products over savings - and applies what we think is an optimistic cost of capital to these products. To support the pivot towards wealth, we suggest a more realistic EV methodology.
Recommendation 3: unapologetic investment in digital capabilities
Pru''s moat today is its tied distribution capabilities. But future-proofing the business requires continued investment in the digital distribution tools (e.g. Pulse) to build the moat of the future.
Potential upside: incremental capital-light growth could add 26% to valuation
In a simple scenario in which the free surplus generation grows at an additional 1% CAGR, and we add 0.25% to our terminal growth rate, Prudential would see a 26% higher valuation under our framework. A key driver of the...
