Exploiting a savings and investment market that is still developing rapidly should pay off for Prudential and its shareholders, argues this expert.
The optimism from UBS analysts comes after a year in which shareholders have seen plenty of change, just not much in terms of the FTSE 100-listed share price.
The separation of US-based Jackson National Life, and subsequent drive to broaden the company's Asia investor base, had been seen as potential catalysts for a share price that's largely underwhelmed in the FTSE 100 index over recent years.
The stock today stood at 1,419p, representing a modest 3% rise so far this year and down on the high of 1,598p seen in May. However, today's analysis from UBS suggests this masks a 25% outperformance by Prudential over AIA in the past four months.
The Swiss bank said the relative valuation differential between the two had roughly halved in that period, having noted that Pru was undervalued by 40% in August.
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As well as the benefits of the US demerger, it said this reflected industry headwinds in China where AIA has greater exposure relative to Pru.
Pru's relative free cash flow generation has been inferior to AIA's, but UBS believes the gap will narrow as a result of it growing its health and protection business and as the Pru implements cost savings and debt reduction initiatives following the US demerger.
Pru currently trades at 1.1 times its embedded value versus AIA at 1.5x on a like-for-like basis.
UBS said: “Although the valuation gap has reduced significantly over the last four months, we still see at least 20% upside to Pru's current share price and value its Asian business at 1.4x embedded value.”
The bank's new price target is 1,720p, which represents a 2% decline on its previous guidance after lowering new business profit expectations across some markets.
Citigroup recently restarted its coverage with a “buy” recommendation and 1,879p target price, while Morgan Stanley last month upped its estimate to 1,764p.
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September's separation of Jackson National Life represented the final part of the Pru's structural transformation after previously spinning off its UK and European unit.
Proceeds from the demerger provided Prudential with a capital boost, allowing it to pay down debt and invest in the Asian and African units constituting the new company.
It hopes to exploit a savings and investment market that is still developing rapidly due to a growing middle class and where insurance penetration remains low. 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.
The company recently moved to widen its Asia shareholder base by issuing shares worth 5% of its capital, raising about £1.8 billion from Hong Kong-based institutions and retail investors in the process. About 70% of Pru investors were previously based in the UK and US.
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