Prudential: another spin-off gets investors excited

Covid-19 hits insurer’s shares and profits, but market backs plans to target Asia and Africa as IPO looms.

Prudential's (LSE:PRU) announcement today that it wants to exit the US market by fully separating its Jackson business had been largely expected.

Having already spun off its UK and European unit in the form of M&G, this update is as much about strategy as the current operational challenges facing the group.

An initial public offering (IPO) is scheduled for the first half of 2021, assuming market conditions are favourable. If not, a demerger of the business would take place, but in either event Jackson will be fully separated from the group. 

Proceeds from the IPO, followed by further sales of Prudential’s stake over time, should provide a drip feed of capital. The group could use that to pay down debt or invest in the Asian and African units which will constitute the new Prudential. 

A renewed focus on Asian markets makes particular strategic sense.

The savings and investment market is developing rapidly in the region due to a growing middle class. Insurance penetration remains low, providing a gilt-edged opportunity for the group. 

Indeed, the recent pandemic has sharpened the focus of customers who now have more of a propensity to insure against health or employment impacts following such an outbreak. 

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Adjusted operating profit in Asia rose by a healthy 14%, although Hong Kong issues, notably the travel restrictions of the lockdown, let alone any geopolitical concerns, resulted in a painful decline of 45% in new business profits. 

Even so, the group has been rapidly developing alternatives for such eventualities. Its Pulse by Prudential app has been downloaded 8.1 million times to let customers access the company’s services remotely.

Of equal importance, 70% of users are new customers. The re-engineering of its business also means that 90% of its products in Asia can now be sold without the need for face-to-face contact. 

Tapping into the growing health, protection and savings market of these burgeoning regions has long held appeal and should continue to do so. 

The Chinese economy in general is now beginning to find its feet, having largely been first in and first out of the coronavirus pandemic. Additionally, any number of projections say the country will become the largest economy in the world within a decade.

At a group level, the balance sheet remains reassuringly strong, with a capital surplus of $12.4 billion (£9.48 billion). Prudential has a cover ratio of 334% (up from a previous 309%), providing a strong base to implement its new strategic direction.

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Prudential has not escaped the impact of the pandemic, however, and group profit after tax fell by 54%.

Further out, the markets and geographies in which it will operate are notoriously competitive, while both Asia and Africa can occasionally fall foul of political turbulence. 

From an investment perspective, the rebasing of the dividend - which effectively strips out the contribution of the Jackson unit - implies a dividend yield of somewhere around 1%. So for investors, growth, rather than income, will be key.

The shares have been buffeted along with profits, and despite an improvement of 12% over the last three months the price is nonetheless down 16% over the last year.

This is largely in line with the broader index, as the FTSE 100 has fallen 15%. 

However, Prudential is a perennial target for longer-term growth bulls and this renewed focus on potentially lucrative markets is likely to consolidate the market consensus of the shares as a ‘strong buy’.