Prudential makes progress on catching a big rival

Our equities writer looks at how insurance and retirement giant Prudential is doing in its race against AIA. 

Attempts by Prudential (LSE:PRU) to bridge an estimated 40% valuation gap to its Asia rival AIA (SEHK:1299) have been boosted this week with confirmation that its US demerger will go ahead on 13 September.

The separation of Jackson National Life is regarded as a potentially significant catalyst for a share price that's largely underwhelmed in the FTSE 100 index over recent years.

The widely held stock today traded at just below 1,400p, whereas analysts at UBS this week highlighted a target price of 1,770p based on the company's “high-quality” business in Asia.

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Their research suggests that the Pru's Asia business is undervalued by 40% relative to AIA, partly because the Jackson ownership has hindered the ability to make comparisons.

It also notes a lack of liquidity among Asia investors to help unlock this upside, given that an estimated 70% of Pru investors are based in the UK and US.

This is something the company plans to address by raising at least $2.5 billion (£1.8 billion) from Hong Kong-based institutions and retail investors once the US demerger is complete.

The Jackson National Life move was first announced by Pru boss Mike Wells a year ago and has taken longer than expected to get over the finishing line due to the protracted involvement of US regulators.

More details on the separation and the standalone prospects for the Asia business are expected with half-year results on August 11.

Prudential shareholders will be asked to approve the plan later this month before the demerger is finalised in mid-September.

It will complete the Pru's structural transformation, having previously spun off its UK and European unit in the form of M&G (LSE:MNG).

Proceeds from the demerger should provide Prudential with a capital boost, allowing it to pay down debt and invest in the Asian and African units constituting the new company. 

Analysts think that a renewed focus on Asian markets makes strategic sense, given that 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.

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

UBS said its sum-of-the-parts view of the Asia business compared with AIA supports its conviction that Prudential is significantly undervalued on 1.1 times its embedded value, versus 2.3 times for its closest peer.

They added this week: “We believe enhancing disclosure to improve comparability and reduce complexity will be a step Prudential needs to take to bridge this valuation gap.”

Their commentary also highlighted the need for a more balanced business by increasing the Pru's China exposure and boosting liquidity among Asia investors.

“All these represent potential future catalysts to unlock upside, with the latter due shortly after 13 September,” UBS said.