The re-rating potential for Prudential (LSE:PRU) shares after their year in the shadow of China’s faltering economy will be addressed next week when the insurer posts interim results.
The FTSE 100-listed stock is at its lowest lowest level since the reopening of the China-Hong Kong border and down more than 18% in the Pru’s 175th anniversary year.
However, analysts at UBS and Deutsche Bank see a big upside for shares as their focus turns to the strategy of new chief executive Anil Wadhwani alongside results on 30 August.
They believe there’s the chance for management to seize the initiative by outlining ambitious targets based on the Pru’s high-growth, high potential markets in Asia and Africa.
Having split from M&G and Jackson National Life in recent years, the Pru is now focused on life and health insurance and asset management in 24 markets across the two continents.
About 50% of the group's projected new business comes from Hong Kong and China, but post-Covid optimism has faded following a run of poor economic updates and fears over the country’s debt-laden property sector. The Hang Seng index recently entered bear market territory after falling by more than 20% from January’s high.
Pru shares, which are dual listed in London and Hong Kong, have underperformed relative to main peer AIA Group Ltd (SEHK:1299) as well as UK insurance peers in recent months.
They stood at 960.6p this afternoon, but Deutsche Bank has a target price of 1,540p. On its estimates, it says the shares trade on an “attractive” 12 times 2024 earnings.
Previewing next week’s results, the bank expects annual premium equivalent growth of 38% as the return of mainland China customers to Hong Kong continues to boost activity. Operating profits under the new IFRS accounting standard are set for $1.33 billion, with the interim dividend forecast to rise 9% to 6.26 US cents a share.
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It expects the CEO’s strategy will be “evolutionary rather than revolutionary”, mainly as the group’s size prevents large-scale changes in one go.
Research analyst Rhea Shah added: “Saying this, we estimate that the group could have up to $5.7 billion of capacity to use for organic and inorganic growth - which could aid sales and earnings growth such that the group can diversify away from dependence on Greater China.”
UBS, which has a 1,405p price target, expects a new business growth surprise in the Hong Kong business, with its optimism fuelled by the read across from earlier updates by HSBC Holdings (LSE:HSBA) and Manulife Financial Corp (NYSE:MFC).
The bank has considered the possibility of share buybacks but believes Pru can deliver greater returns from writing new business relative to its current market implied cost of equity.
It said this week: “We believe Pru can re-rate if management provides ambitious growth targets with first-half results. If the shares still do not re-rate following such an announcement, we believe a share buyback could be on the cards.”
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