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Management delivered solid growth in sales and new business profits, primarily driven by Hong Kong, but the overall book of earnings and free surplus generation are lagging this considerably due to lower investment returns and normalisation of claims experience. With $1bn of investment into platforms, better tech and services, we need to see a return on this quickly. Management must execute against plans diligently. We believe the long-term prospects of the Pru franchise remain intact, at current valuations, the stock is too cheap.
Prudential plc
Management delivered solid growth in both sales and new business profit for the nine months to September. This was helped by strong growth in Hong Kong following the opening of the border with the mainland earlier in the year and despite the discrete third quarter seeing a slowdown in China following implementation of industry-wide regulatory changes. We continue to expect solid growth at attractive margins, the franchise is well placed in navigating changes and benefits from being spread across multiple growth markets and distribution channels.
Evolution, not revolution (and none the worse for it) CEO Anil Wadhwani has now laid out his strategic plan for the Group, including financial targets through to 2027. The focus will be on customer experience, technology-powered distribution, and transforming the Health business model - all important priorities, in our view, that mark a continuation in the focus on Pru''s new business production advantages. New financial targets marginally positive The New Business Profit and free surplus generation targets are ahead of our previous forecasts, which we take to be a positive, albeit the group will need to spend an additional USD1bn to build the capabilities necessary to achieve these targets. The focus is on the organic opportunity - but on top of this we see c.USD4bn of excess capital and c.USD5bn of debt headroom available for inorganic opportunities. HK reopening proceeds well; exposure to negative trends in China seems limited Pru''s equity debate is currently focused on Greater China: both the benefit to be derived from the reopening of the MCV market in HK, and the exposure to negative Chinese macro trends (e.g. in Real Estate). The latest data suggests the group is seeing a significant benefit from the reopening of MCV business. And we see the exposure to the downturn in the Chinese macro as manageable, with limited real estate on the balance sheet. Upgrading to Neutral after 25% underperformance Pru''s shares have underperformed the SXIP by c.25% since we downgraded to Underperform in January. In light of this performance, combined with the relatively positive implications of the new plan for valuation, we now upgrade the shares to Neutral.
Management delivered on growth in sales and new business profits largely thanks to the opening of the border between mainland China and Hong Kong, allowing visitors to flock back and purchase insurance policies in the peninsula. Travel numbers are still 50% below 2018 levels, suggesting there is more to come. This clearly gave management confidence in setting the new growth targets of achieving new business growth of 15-20% CAGR between 2022-27 and translating this into cash flow growth compounding at double-digits over the same period. We reaffirm our Buy rating.
Adjusting our IFRS 17 estimates Following investor feedback and observations of reporting under the new IFRS accounting standard from other insurers, we have adjusted our modelling of Prudential''s IFRS 17 PandL. The principal changes are a) we now assume a reduction in investment income in FY23 vs. FY22, reflecting the mark-to-market impact on the asset balances over the course of FY22; b) we estimate the CSM release as a % of average CSM over the course of the reporting period, rather than the end of period. The net impact is to reduce EPS by c.8%. No change to valuation, which is based on distributable capital generation These changes are purely related to the way we model the PandL under the new accounting standard. They do not impact our valuation, which is based on the distributable capital generation.
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...
In January, we relaunched our approach to the insurance sector with a focus on cash distribution capacity (Cash Nexus). After a hiatus to deal with the sector balance sheet topics (assets, real estate and lapse), this note reviews what we learned on cash generation from Pru''s FY22 results. Context: one of the most popular long positions in the insurance sector Our downgrade of Pru to U/P has been one of our most controversial stock calls. Our conversations with investors suggest that Pru remains one of the most popular holdings in the insurance sector. Lifetime surplus emergence increased by 20% in FY22 - but back-end loaded In FY22, the lifetime surplus generation to come from the in-force book grew by c.20%, well above the 9% CAGR since 2010. This is a clear positive - but was largely driven by the movement in bond yields, with the effect most pronounced on outer years. On our basis, the present value grew by 7%. Acquisition capacity of USD4-6bn: about enough for either Indian or Chinese Life JVs Assessing Pru''s surplus capital position is not simple - but we estimate that there''s USD2-4bn that could be deployed, plus the company flagged USD1.6bn of debt leverage headroom. At a stretch, we think this would be just about sufficient to acquire the remaining 50% stake in the Chinese Life JV or the 52% maximum stake build in the Indian Life JV without raising equity (although the group might choose to raise equity for such sizeable deals to maintain balance sheet flexibility). In the context of IFRS d/g and a rate-driven EEV decline - what financial metrics matter? Guidance on IFRS 17/9 suggests op profit in FY22 would have been 19-25% lower. This doesn''t change the fundamentals. But the challenge for Pru, we think, is that the investment community is less clear on what financial metrics really are of fundamental importance. Management uses EEV as their priority reporting metric, but what also became clear in FY22 was how sensitive EEV is to...
The FY22 numbers continued to be impacted by covid restrictions across Asia, most intensely felt across its Hong Kong and China business. This partly led to a reduction in new business profits with rising rates also leading to a higher discount on future profits. Looking ahead there is a clear tailwind following the removal of covid restrictions, the bedding down of recently deployed technology, and the arrival of a new CEO to inject energy across the Asia and Africa focused insurer. We reaffirm our Buy rating.
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...
Prudential has reported H1 2021 results. Overall numbers beat consensus. We view the new business sales and profit numbers as encouraging as they reflect the benefits of Pru’s geographical diversification, digital capabilities and new product offering. We continue to believe in Pru’s capability of delivering its long-term growth in both Asia and Africa while weathering uncertainties from Covid-19. We also view the recent announcement of the completion date of the demerger for Jackson (13 September) as a step forward in simplifying the business. We reiterate our Buy rating with unchanged TP of 1610p.
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...
Prudential is a great business. But we don''t see how it can avoid headwinds to its major growth driver: Mainland Chinese buying life insurance in Hong Kong. And we don''t think the comparative Balance Sheet exposure is well understood. We initiate on Underperform. Don''t get us wrong - we think this is a fantastic business The go-forward business in Asia has major competitive advantages in distribution. And the drivers of Asian life insurance growth are powerful. This should allow the business to redeploy earnings above its cost of capital - making Prudential a classic compounder. But Mainland Chinese purchases in HK have driven the growth - and we see headwinds But look closer, and Asian growth over the past several years has actually been propelled by Mainland Chinese tourists buying life insurance in Hong Kong, making up c.35% of total Asian New Business Contribution in 2019. Prudential has done a great job of capturing their business. But we think political, economic and healthcare trends are going the wrong way, reducing the incentives for Mainlanders to buy insurance in Hong Kong. This note deep-dives the reasons we expect growth to tail-off. Plus, the business model creates underappreciated balance sheet risk 17% of Pru Asia''s fixed income portfolio is invested in High Yield debt. And equity allocations also benchmark high. Is this recklessness? No: this is a necessary consequence of selling certain kinds of insurance products in countries with lower credit ratings. Nonetheless, this creates a degree of risk that needs to be taken into account in the cost of equity. Putting a price on the US business (Jackson), and valuing the go-forward Asian business We think Pru Asia deserves a lower P/E than AIA due to the comparative growth outlook, asset allocation and debt leverage. We think the pricing of Athene''s capital injection into the US business Jackson implies that Pru will receive proceeds of c.USD3.2bn from the IPO (plus USD1.8bn...
The new Prudential has no European business. It will exclusively be focused on Asian and US operations. The UK business was listed separately. Without the mature markets, the growth potential of Prudential is important in Asia, boosted by the low penetration rate. In the US, and after two years of adaptation to the new regulatory framework, the business should benefit gradually from its diversification strategy.
Prudential announced an operating profit of £2,024m (up 14% like-for-like and 21% as reported) for its continuing operations, excluding M&GPrudential. Even the profitability of the “new” Prudential is driven by Asian operations. The demerger of the group is expected to be completed in Q4 19.
M&GPrudential announced its strategy a few months before the expected split of the insurer. The insurer will be structured into business units: Savings & Assets management and Heritage. While a development strategy will be implemented in the first BU, the large With-Profit business of the Heritage unit will be closed to new customers and managed by a specialised company (Diligent). The earnings and the capital position of M&GPrudential are likely to be fragile and would depend on the updates for longevity assumptions.
Prudential’s upcoming demerger (splitting the UK and European operations - M&GPrudential - from the rest of the group) is what the market has wanted for years, and yet the share price response has been to underperform global peers by 16%. We await more information on the plans for M&GPrudential but fundamentally the long-term investment case for the group remains as strong as ever. Asia still has huge amounts of growth potential; the US is an excellent generator of cash and profit and M&GPrudential has an interesting mix of asset management and a unique with-profits offering. The moment of break-up could provide a rocky ride over the next 12-18 months, but we expect investors will be rewarded for holding on. Our fair value of 1,950p indicates 27% upside, more than enough to offset any risk from the demerger as you are effectively getting M&GPrudential for free. We resume coverage with a BUY recommendation.
Prudential announced operating profit of £4,827m (up 6% lfl) and net profit at £3,013m (up 30% lfl). Like other UK Life insurers, Prudential benefited from new longevity assumption changes (£441m). The Asian business was the major contributor to earnings (c. 38%) as the US operations were hit by equity market movements. The demerger process is progressing well. The insurer announced African acquisitions in Cameroon, Ivory Coast and Togo, but we do not expect a significant impact on the group’s figures.
Prudential announced operating profit of £2,405m (up 9% lfl). All business units posted improved earnings: +14% for Asia (£1,016m), USA (+2% to £1,002m) and M&G Prudential (+4% at £778m). The planned demerger of M&G Prudential from the group, which will result in two separately-listed companies, is progressing well. The insurer’s status of a good dividend payer is confirmed with an interim dividend of 15.67p/share, up 8%.
Prudential announced operating profit of £4,699m (up 6% lfl) and net profit at £2,390m (up 24% lfl). It also announced a major event: the demerger of M&G Prudential from Prudential plc. to focus on regions with extreme rapid growth. M&G will have the opportunity to improve its profitability through more control over its capital allocation. The insurer’s status of a good dividend payer should be kept thanks to the cash generated by the retained businesses.
Ahead of today’s investor conference Pru has announced yet another strong performance for Q3 with new business sales at £5174m APE (+16% or +8% at CRE) and more importantly new business profitability at £2469m (+26% or +17% at CRE). The Q3 new business margin has improved to 47.7% (Q3 2016: 43.9%) with improvements in the UK, US and Asia. The growth and new business profit in Q3 reinforce our SOTP valuation model that generates our 2210p target price. We believe that today will be about emphasising the huge opportunities that exist in each of these areas. In Asia the health, protection and savings of the rapidly growing middle class, in the US the retirement income needs of the baby-boomers and in the UK the opportunity created by the converging life and savings markets. Buy.
Prudential’s 9M 17 Life new business profit increased by 17% to £2,469m. The Asian business posted a growing new business profit increase of 15% lfl (up 24% as reported) to £1,616m. APE sales increased by 5% (up 14% as reported). Eastspring AuM reached £44.3bn. In the USA, Jackson’s new business profit increased by 17% (up 28% as reported) to £619m. In the UK & Europe, M&G Prudential delivered external asset management net inflows of £9.9bn. In addition, continued demand for risk-managed solutions has driven life insurance APE sales growth of 25%, with new business profit up 31% to £234m. This includes APE sales growth of 32% from PruFund-backed products, which generated net inflows of £6.6bn. M&G Prudential’s total AuM increased to £336bn. The estimated group shareholder Solvency II surplus at 30 September 2017 was £12.8bn, equivalent to a cover ratio of 201%.
Following the better than anticipated interim results last week we have edged up our IFRS earnings and increased our target price to 2210p from 2061p previously. There has been considerable speculation concerning a possible disposal of the UK business, now including M&G and our take on it is that it would be very good news for shareholders. The disposal of the UK business should make the remaining businesses in the US and Asia look even more attractive than they are currently, particularly for Asian investors. Placing a post UK sale valuation on Pru in line with its Asian peer AIA would result in a valuation north of £28/share. Buy.
Prudential has delivered a solid set of interim results with headline IFRS Operating profit at £2358m (+15% or +5% at CRE) better than expected reflecting £188m of management actions suggesting an underlying beat of 1%. On an EEV basis, post-tax Operating profit was £2870m (+27%) well ahead of consensus driven by new business profitability at £1689m (+34%). The formulaic interim dividend was as expected at 14.5p/share (+12%). The surprising news is that M&G and Pru UK/Europe are to merge (£145m cost savings at a one off cost of £250m to achieve) to form ‘M&G Prudential’. Slightly odd given that the market was half expecting some announcement concerning the part sale of Pru’s UK book. We maintain our Buy recommendation and 2061p target price.
Pru surprised the market yesterday with a couple of unexpected announcements alongside the planned SFCR update. Firstly trading is clearly going very well with Q1 new business sales at £1907m APE (+33% or +18% at CRE) and new business profitability increasing faster at £856m (+42% or +25% at CRE). The Group SII surplus estimated at £12.4bn is equivalent to a cover ratio of a very healthy 198%. Secondly, well regarded Group CFO Nic Nicandrou has been appointed CEO of Asia whilst a Managing Partner of Deloitte UK is being brought in as the new Group CFO. Whilst we view the trading update as very positive we were slightly surprised about the change in senior management coming so soon after the last round of changes. We maintain our Buy recommendation and 2061p target price.
Pru surprised the market today with a couple of unexpected announcements alongside the planned SFCR update. Firstly trading is clearly going very well with Q1 new business sales at £1907m APE (+33% or +18% at CRE) and new business profitability increasing faster at £856m (+42% or +25% at CRE). The Group SII surplus estimated at £12.4bn is equivalent to a cover ratio of a very healthy 198%. Secondly, well regarded Group CFO Nic Nicandrou has been appointed CEO of Asia whilst a Managing Partner of Deloitte UK is being brought in as the new Group CFO. Whilst we view the trading update as very positive we were slightly surprised about the change in senior management coming so soon after the last round of changes. We maintain our Buy recommendation and 2061p target price.
Last week Pru comprehensively beat expectations with its 2016 year end results. The beat was due to a combination of factors including better margins and an FX tailwind that has continued into this year. We have increased our 2017/18 IFRS EPS forecasts by 6% and our 2017F EEV NTAV by 7.0% to 1646p/share. We also note with interest that the word ‘Optionality’ has reappeared in its presentations suggesting to us that the UK business may be ‘on the blocks’. Irrespective of that, the improving trading outlook together with the better than anticipated EEV NAV has led us to increase our SOTP derived target price 1850p to 2061p/share. Buy.
Prudential announced an IFRS operating profit of £4,256m, up 7% at AER (-2% at CER) relative to 2015. The major contributor to operating profit is the US division (£2,030m), while the Asian and UK businesses stood at £1,644m and £828m, respectively. EEV new business profit grew by 18% to £3,088m: £2,030m (+18% yoy) from Asia, £790m (-2% yoy) from the US and £268m (+33% yoy) from the UK. APE sales increased by 16% to £6,320m, led by Asia (+33% yoy at £3,599m) and the UK (+33% yoy to £1,160m). In the US, APE sales were 10% lower at £1,561m. M&G assets under management rose to £264.9bn. Eastspring Investments delivered a strong performance and assets under management stood at £117.9bn vs. £89.1bn in 2015. The group’s underlying free surplus generation increased by 18% to £3,588m and cash remitted by business units rose by 5.7% to £1,718m. As at 31 December 2016, the Solvency II ratio reached 201%. The board has decided to increase the full-year ordinary dividend by 12% to 43.5p per share (final dividend of 30.57p per share).
Prudential has delivered a great set of 2016 results. IFRS Operating profit at £4256m (+7% or -2% at CRE) was well ahead of consensus at £4,115m and this was net of a £175m FCA annuity provision in UK life. On an EEV basis Operating profit was £5497m (+14% or +3% at CRE), well ahead of consensus at £4,956m, driven by new business profitability particularly in Asia, FX and a strong in force result. The full year dividend at 43.5p/share (+12%) was a 5% beat on consensus although no special dividend this year. The outlook remains challenging but Pru is performing well and in our view the shares are attractively priced on our sum of the parts valuation basis. We maintain our Buy recommendation and our 1850p per share target price.
Pru has released a Q3 trading update ahead of its annual investor conference that takes place today. There were no major surprises in Q3 with sales at £4550m APE (+16% or +8% at CRE) and new business profit at £1970m (+19% or +9% at CRE).The capital position remains strong with a capital ratio of 189% (30 June: 175%) and it has clarified its dividend policy from a rather vague 2x cover to growth of 5.0% per annum with potential additional distributions as/when appropriate. The combination of a rising yield curve and good Q3 performance has led us to increase our target price from 1610p to 1850p. We maintain our Buy recommendation and believe that the shares are significantly undervalued.
Prudential is recovering on markets with a 3-month performance of more than 7%. Despite the sharp decrease in H1 16 EPS (-52% to 26.9p), IFRS operating profit is positive with a 6% decrease at CER to £2,059m. EEV new business profit grew by 8% to £1,260m. The group’s underlying free surplus generation increased by 13% to £1,609m and cash remitted by business units rose by 5% to £1,118m. Regarding the performances of the business units, the British insurer continued to perform well in the US market, focusing on variable annuities with an operating profit of £888m. In the UK, there was a 51% improvement in APE sales to £593m. Operating profit increased by 8% to £473m. In asset management, M&G experienced net outflows of £6.9bn, but operating profit decreased by 10% to £225m and cash remitted remained stable at £150m. Asia has delivered an operating profit of £743m, +15% yoy. At Eastspring, external net outflows of £244m and positive market movements have driven total FuM to a record level of £105bn, +5% yoy. The Group Solvency II surplus is estimated at £9.1bn, equivalent to a ratio of 175%.
The announcement of the successful IPO of the JV “ICICI Pru Life” at a £5.6bn valuation highlights the value of Pru’s Asian operations. Pru’s 26% stake is valued at £1.4bn or 3.4x Embedded Value. If we were to value the rest of Pru’s Asian business on a similar multiple our ‘Sum Of The Parts’ valuation would lead us to a target price of c£28 per share. We maintain our Buy recommendation and 1610p target price.
Prudential has delivered an excellent set of interim results with headline IFRS Operating profit at £2059m (+9% or +6% at CRE), some 10% ahead of expectations and 10% ahead of our £1874m forecast. There are a number of one-offs included in the result but excluding these the underlying figure of £1954m was still a 4% beat to consensus. On an EEV basis, post-tax Operating profit was £2263m (-1%), bang in line with consensus driven by new business profitability at £1260m (+6% or +2% at CRE). The dividend has increased to 12.93p/share (+5%) in line with consensus driven by the 1/3rd of the previous year ‘formula’. We maintain our Buy recommendation but increase our target price to 1610p/share from 1545p previously.
Prudential will report its H1 2016 results at 9.30am on Wednesday 10 August. We are forecasting a relatively flat performance with underlying performance and FX being largely offset by lower sales in the US and a number of UK bulk annuity deals written in H1 2015 not being repeated. If the results are in line with our forecasts we suspect that they will be seen as a blip and that the growth prospects in Asia will ultimately drive the share price higher over time. That said, we have decided to trim our price target to 1545p from 1891p per share to reflect the operational headwinds that face the business in each of its three key business areas.
Following the 2015 year end results we are cutting our operating earnings forecasts for 2016/17 by 8% and 10% respectively. Although our new EPS forecasts are lower than 2015, it is worth highlighting the latter benefitted from c£400m of one-off UK ‘management actions’. Excluding this positive impact we are forecasting further continued progress in 2016 over 2015. The 10p/share special dividend announced in February was in line with our view that Pru is overcapitalised and has excess capital to return to shareholders. Although the share price has been under pressure this year reflecting lower investment markets and others have cut their target prices we maintain our Sum of the parts derived target price at 1891p/share. Buy.
Prudential has delivered a good set of 2015 results that have been helped by a release of money set aside in the UK in H2 in case Solvency II (SII) was more of an issue than first thought. IFRS Operating profit at £4,007m (+26% or +22% at CRE) that was well ahead of consensus at £3,634m but this benefitted from £339m of SII releases. Excluding this benefit the profit was largely in line. On an EEV basis Operating profit was £4,881m (+19% or +16% at CRE), well ahead of consensus at £4460m, driven by new business profitability at £2617m (+24% or +20% at CRE). There was no real impact from the UK SII actions on EEV profitability. The full year dividend at 38.78p/share (+5.0%) has been supplemented by a surprise 10.0p/share special dividend reflecting the UK management’s actions. The outlook remains challenging but Pru is performing well and in our view the shares are attractively priced on our sum of the parts valuation basis. We maintain our Buy recommendation and our 1891p per share target price.
Prudential announced an IFRS operating profit of £4,007m, up 22% at CER. The major contributor to operating profit is the US division (£1,691m), while the Asian and UK businesses stood at £1,209m and £1,167m, respectively. EEV new business profit grew by 20% to £2,617m. All business units contributed to this growth, with £1,490m (+28 yoy) from Asia, £809m (+8% yoy) from the US and £318m (+23% yoy) from the UK. APE sales increased by 17% to £5,607m, led by Asia where APE sales were 26% higher at £2,853m. In the US, APE sales were 3% higher at £1,729m as demand for variable annuities remained strong. In the UK, APE sales grew by 23% to £1,025m. M&G experienced net outflows of £7bn vs. net inflows of £7.1bn in 2014. However, Eastspring Investments delivered a strong performance with third-party net inflows of £6bn. The group’s underlying free surplus generation increased by 15% to £3,050m and cash remitted by business units rose by 10% to £1,625m. As at 31 December 2015, the IGD surplus was estimated at £5.5bn and the Solvency II ratio stood at 193%. The board has decided to increase the full-year ordinary dividend by 5% to 38.78p per share (final dividend of 26.47p per share). In addition, the board has decided to award a special dividend of 10p per share.
We expect a solid set of results next week, with the Asian businesses demonstrating the resilience of Prudential’s distribution and product model in the region in the face of market volatility. We reduce our price target in line with the rest of the sector, however, we retain out BUY rating.
Pru's annual conference yesterday confirmed its very impressive track record in its chosen markets and reassured in areas where there is/was concern. It was a good first conference in charge for the relatively new Group CEO Mike Wells but it was hard not to come away asking if Solvency II was really worth the 18 years in the making and c£300m cost to the company. Solvency II aside our key takeaway was surprisingly the UK where there is talk possible acquisitions and withdrawing from the massive bulk annuity market given the additional capital risk margins required under SII. We think the outlook for Pru remains good and that following the share price fall the shares look particularly attractive.
Ahead of its annual investor conference today Pru has released three announcements 1) The 30 June 2015 Solvency II (SII) surplus was £9.2bn with a solvency ratio of 190% at the top end of our 180-190% range. 2) John Foley, former Group Investment Director and Group CRO appointed UK & Europe CEO 3) Conference to highlight long term strengths and good progress being made towards the 2017 financial objectives despite volatile markets. In our view these announcements are reassuring and will be well received by investors but are unlikely to drive the share price higher in the short term, given that they're largely in line with expectations. We maintain our Buy recommendation and 1891p target price, which reflects what we view as a relatively conservative sum of the parts valuation.
Prudential recorded 9M 15 new business profit of £1,764m, +13% on a CER basis (+17% on an AER basis). Double-digit growth was also observed in new business APE sales in Life insurance in Asia (+27% to £2,021m) and the UK (+26% to £613m), however there was a 5% decline in the US to £1,278m. In Asia, new business profit increased by 24% to £976m at CER (+26% at AER), driven by APE sales growth. For Q3, APE sales increased 20% to £655m. Concerning the asset management business, Eastspring Investments saw an 18% increase in FuM to £82.4bn in the 9M. In the US, separate account assets were up 4% to £84.1bn. Jackson delivered new business profit of £557m (-4% on CER but +5% on AER). The UK business posted a 16% increase in new business profit to £231m during the 9M 15. Note that Prudential continues to develop businesses in Kenya, Ghana and Uganda and has announced long-term bank distribution agreements with Fidelity Bank in Ghana and Standard Chartered in Kenya in August 2015 to complement its fast-growing agency forces. In asset management, M&G’s retail business continued to experience net outflows of £2.7bn in Q3. Retail net outflows in the 9M reached £7.3bn vs. inflows of £5.3bn in 2014. M&G’s institutional business generated £1.2bn of net inflows in Q3, resulting in cumulative net inflows of £2.3bn ytd. Overall, total M&G FuM reduced to £247.5bn from £257.3bn in 9M 14 due to net fund outflows and negative market movements. As at 30 September 2015, the IGD surplus was estimated at £5.1bn, equivalent to a cover ratio of of 2.5x. In preparation for Solvency II, Prudential submitted its internal model applications to the Prudential Regulation Authority and received Matching Adjustment approval. The approval process is expected in December 2015.
Pru has reported a solid Q3 trading update that confirms trends seen in H1 with sales for the 9m to 30 September 2015 at £4061m (+19% or +14% at CRE) slightly ahead of expectations with consensus at £4,008m APE and very close to our £4,084m forecast. New business profit at £1764m (+17% or +13% at CRE) was ahead of consensus at £1713m and just above our close to the top end of the range £1756m forecast. It has been driven by the UK (+16%), US (+5% reported but -4% at CRE) and Asia (+26% reported or +24% at CRE). As anticipated the new business margin has eased slightly to 43.4% (9m 2014: 44.2%). There was another strong performance from M&G and the cash and growth targets remain on track whilst Pru continues to maintain a strong balance sheet and of Solvency II. The valuation remains attractive despite the recent share price recovery. Buy.
Pru has announced that Jackie Hunt the UK CEO has stepped down with immediate effect and that John Foley has been appointed as her interim successor. This is a shock move and comes only two years after she joined Pru from Standard Life where she was Group Finance Director. Whilst inevitably there will be speculation over the reason why she has departed we do not think that there is anything untoward happening within the UK business (which had a strong H1 performance) that could have resulted in her surprise departure. We suspect that she has been replaced following a clash in personalities with the new Group CEO Mike Wells who took over from the previous Group CEO Tidjane Thiam in the Summer.
Prudential announced an IFRS operating profit of £1,881m in H1 15, up 17% at CER. EEV new business profit grew by 12% to £1,190m. The group’s underlying free surplus generation increased by 12% to £1,418m and cash remitted by business units rose by 10% to £1,068m. Regarding the performances of the business units, the British insurer continued to perform well in the US market, focusing on variable annuities with an operating profit of £834m. In the UK, there was a 25% improvement in APE sales to £393m, despite lower sales of retail annuities. Operating profit increased by 19% to £436m. In asset management, M&G experienced net outflows of £2.4bn, but operating profit rose by 11% to £251m and cash remitted increased by 11% to £151m. Asia has delivered an operating profit at £632m, +17% yoy, driven by 15% growth in life businesses and 35% growth in Eastspring Investments. At Eastspring, external net inflows of £4.6bn and positive market movements have driven total FuM to a record level of £85.3bn, +28% yoy. The Insurance Groups Directive surplus reached £5.2bn. Solvency II requirement are covered at 2.5x and the internal model was submitted to Prudential's Regulation Authority for approval. The insurer increased its interim dividend by 10% to 12.31p/share.
Prudential has delivered yet another excellent set of interim results led by the new CEO Mike Wells. Headline IFRS Operating profit at £1881m (+24% or +17% at CRE), was some 8% ahead of expectations and 5% ahead of our £1783m forecast, driven by a strong performance across all operations. On an EEV basis, post-tax Operating profit was £2278m (+17%), delivering a 10% beat against consensus driven by new business profitability at £1190m (+18% or +12% at CRE). The dividend has increased to 12.31p/share (+10%) bang in line with consensus. Whilst M&G has seen some net outflows potential areas of concern such as Hong Kong (re China) have performed exceptionally well and Pru's Solvency II discussions appear to be progressing well. We maintain our Buy recommendation and 1891p/share target price.
In the second largest economy in the world, the plunge in equities in the last three weeks has reached $3,000bn in market value. More than a third of all listed firms on the Shanghai and Shenzhen exchanges have suspended dealings in their shares to restore confidence. Despite stability measures taken by local authorities, investors are still nervous. Prudential is exposed to the Chinese economy in that Prudential Corporation Asia (incorporating the asset management business, Eastspring Investments) is one of its four business units. The British insurer is present through a JV with CITIC and its portfolio of customers is estimated at 0.06% of the total population.
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