Interactive Investor

Prudential: can new purpose and new strategy revive share price?

There are plenty of bullish investors who remain confident about the FTSE 100 insurer’s longer-term prospects, but the shares keep falling. ii’s head of markets talks through latest developments.

20th March 2024 08:21

Richard Hunter from interactive investor

    Prudential (LSE:PRU) has a new purpose and a new strategy, and the early signs of this refreshed focus after a change at the top are extremely encouraging.

    Now fully focused on Asia and Africa, the group is fully aware that such major continents bring significant opportunities. The combined populations of the two continents is around four billion, with an estimated $1 trillion of additional annual gross written premiums by 2033 being the addressable market.

    The company had previously noted that in Asia, for example, household wealth was over $150 trillion in 2021, broadly similar to North America and well in excess of Europe, while it is expected that by 2030 Asia and Africa will house three-quarters of the global working age population. 

    Prudential has stated that it now has a “relentless” focus on executing the new strategy against some stretching targets, and already those 2027 aims are coming into view. The stated objectives, including compound annual growth of between 15% and 20% in new business profit to 2027, are particular punchy, but even at this early stage the group is increasingly confident of achieving these goals.

    If the last year is to be reflective of medium-term growth, it is understandable that the group has high aspirations. For this period, new business profit rose by 45% to $3.1 billion, ahead of the expected $2.9 billion, and largely driven by an improved performance from Hong Kong, which itself contributed 45% of the profit. This followed the reopening of the Chinese economy following the pandemic and, equally importantly, visitors from mainland China are now almost back to normal levels which automatically boosts the company’s trade in that region. 

    At the same time, the group’s Asia-based investment arm, Eastspring made a much-improved profit contribution and now has assets under management which total $237 billion, helped along by some positive market movements as well as new client inflows. The structure also allows for some of the virtuous circle of new funds being managed separately to benefit the group as a whole, and Prudential attributed Eastspring’s contribution and lower central costs as major drivers towards an adjusted operating profit of $2.9 billion for the year, up by 8% on the corresponding period.

    The new strategy also involves other major tweaks which are showing signs of success. The group has transformed its business model for its Health offering, which reported new business profit of $330 million, representing an increase of 20% over the previous year.

    Meanwhile, the focus on digital distribution and the move towards more technology-based solutions continues apace, such as the increasing use of advanced analytics and AI for higher value purposes, which is being selectively trialled.

    The underlying strength of the business, which is also enabling high investment into the refreshed suite of products, is evidenced by a capital cover ratio of 295% and a further hike to the dividend. Even so, unlike some of its sector peers, shareholder returns are not a guiding light and the projected dividend yield of around 2% is pedestrian in comparison.

    Unfortunately the economic clouds which have hung over the likes of China more recently have had a detrimental effect on the share price for Prudential, if not for its long-term prospects. The shares have fallen by 23% over the last year, as compared to a rise of 4.5% for the wider FTSE100 index and have now dropped by some 49% over the last three years in a painful reminder of the ground which needs to be recovered.

    Nonetheless, this lag in the share price has seemingly strengthened the resolve of bulls of the stock, who remain highly confident of the group’s longer-term prospects, as evidenced by a market consensus which continues to come in as a 'strong buy'.

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