Prudential: investors react to mixed half-year results

Prudential (LSE:PRU) continues to plot its course through some choppy waters and for the most part its fresh purpose is now evident and entrenched.

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There are a couple of elements of caution to be navigated here. Firstly, new business profit was up by 9.8% to $1.38 billion (£1.02 billion) and comfortably ahead of expectations of $1.24 billion, with margin improving by 2% to 40%, signalling some high quality acquisitions.

However, while the number all but hits the shorter-term target of double-digit growth, some acceleration is required to reach the medium-term target of 15% to 20% growth over its transformation period.

Perhaps more importantly, and the main reason for the 10% decline in the share price so far this year, is the overhang from concerns over a Chinese crackdown on cross-border investments in the region. This has resulted in estimates of 30% of the group’s new business being driven by mainland China investors buying Hong Kong savings products being reduced to 17%, which has weighed on the price. Even so, Prudential is expecting new business profits in mainland China to be similar to those of last year and, while recognising that it is too early to assess the buying behaviour of those affected customers, the group remains confident in prospects for the Hong Kong business.

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Such optimism seems well-founded. Prudential is now focused on Asia and Africa, where 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.

In addition, the group previously noted that insurance penetration remains low in Asia, where growing demand for savings and protection products come alongside the need for wealth management and retirement planning amid a higher income market. Given the recent weakness of consumer confidence in the region, it will be interesting to see whether, when customers are reluctant to spend, they turn to saving and wealth planning instead.

There is also a growing call that concerns have been priced in on a worst scenario basis and, as such, may be overdone. For its part, Prudential is showing few signs of pressure. For the half-year, annual premium equivalent (APE) sales of $3.43 billion were up by 4.2% and ahead of the expected $3.27 billion, underneath which there was growth of 13% from India and Africa combined. Indeed, part acquisitions are adding to the group’s reach, most notably in India and Malaysia, as Prudential consolidates existing opportunities.

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More broadly, a current highlight is the group’s assertion that it has reached an inflection point in its growth of free surplus capital generation, which in turn will result in higher shareholder returns. Indeed, last year’s $2 billion share buyback programme was completed, followed by an announcement in January of a further $1.2 billion, to be followed by another $1.3 billion programme in 2027. An additional $300 million has been added to this year’s total subject to the receipt of funds from its small stake sale in ICICI Prudential Management Company towards fulfilling its free float requirement there. The dividend was also increased by 15% and, while the projected yield after the hike remains a pedestrian 2%, the share buyback direction should prove more than enough to assuage investors.

Elsewhere, 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. Less positively, and from a broader perspective, heightened geopolitical tensions between the West and China cannot be overlooked, while competition across its markets persists.

The sector as a whole has had a challenging start to the year, with an uncertain recovery in China, wider market weakness and potential AI disruption in distribution all playing a part, let alone fractious geopolitical relationships.

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Nonetheless an adjusted operating pre-tax profit of $1.81 billion for the half-year, up by 10% and ahead of the estimated $1.63 billion, tells its own story. Despite the dip this year, the shares have risen by 7% over the last 12 months, as compared to a gain of 18% for the wider FTSE100 and by 59% in the last two years, even if the price remains down by 33% over the last five years.

Indeed, the opening share price reaction continues to reflect an underlying level of understandable caution. However, with increasing shareholder returns allied to the significant potential and promise in both Asia and Africa, the likelihood of Prudential remaining a core portfolio constituent for investors will no doubt remain high, as evidenced by an unwavering market consensus of the shares as a strong buy.