The Prudential investment case is about jam tomorrow, not jam today. Investors should reward this through a lower yield. The capital generation from the in-force book has been growing at c.8% per year - and we think there''s c.USD4bn of capacity for MandA. But this is not, in our view, sufficient to justify the low yield implied by the current valuation. After a strong run in the past few months, and utilising a new valuation approach focused on distribution capacity (see EXANE EXPLAINS: Insurance - Cash Nexus), we downgrade to Underperform.
With China reopening, new business will hopefully get back to ''normal''
With the Chinese government planning to relax its border controls on the 8th of January, Prudential is likely to see a return of its Mainland Chinese Visitor business in Hong Kong in 2023. This will hopefully lead to a significant recovery in new business volumes, albeit we expect this to be gradual.
What is the long-term growth rate in capital generation? Track record suggests c.8%
Turning away from immediate catalysts, this note focuses on the question of how much distribution capacity Prudential has, and the long-term pace of growth the company can deliver. How fast does the business grow? There is no shortage of ways to measure this - for instance, Asia Embedded Value has grown at a CAGR of 14% since 2011. But if we focus on what we see as the core driver of value - free surplus generation - the company''s growth is actually in the high single digits. To be sure, this level of growth is no mean feat - but it is lower than a focus on other metrics would suggest.
Through the lens of distributable cash, the valuation is demanding
It is widely understood that Prudential trades at a discount to AIA on an Embedded Value basis. The problem as we see it is with the Embedded Value calculation, rather than with the share price. We explain in the note why we do not see Prudential''s Embedded Value methodology as a proxy for valuation, and why we...
