Reaction to M&G's record half-year profit

For the most part this is a progressive half-year update, with M&G  Ordinary Shares (LSE:MNG) having dialled its momentum up a notch in a couple of key areas.

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Net inflows to the business of £2.4 billion are a particular highlight. Not only does this represent an improvement of 14% from the previous year, but the number compares to market estimates of £2.3 billion of outflows. This extreme outperformance was largely driven by the Asset Management business, which added £2.2 billion and where the partnership with Dai-ichi Life of Japan is already bearing fruit.

It was previously announced that the Japanese company would take a 15% stake in the M&G business, with the tie-up seeing M&G become Dai-ichi’s preferred asset management partner in Europe, expecting to generate at least $6 billion (£4.4 billion) of new business flows into M&G funds over the next five years, which should provide additional visibility to profits. Indeed, £700 million towards this figure was chalked up in the first half alone.

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Quite apart from the Dai-ichi deal, the Asset Management (AM) unit is improving its diversification. External client assets grew to £189 billion in the six months to 30 June, over half of the total Assets Under Management and Administration (AUMA) within AM, of which £110 billion came from international clients. This growing international presence should bolster the group’s ambitions to grow the AUMA business generally, and for AM, adjusted operating profit (AOP) was up by a healthy 24% to £159 million.

Within the Life business, the group continues to focus on growing its Bulk Purchase Annuity (BPA) presence in a particularly tough space, and has launched a new UK With-Profits proposition which it believes will have something of a key competitive advantage. This is in addition to completing 11 BPA transactions last year, and the early signs are extremely encouraging.

In the year to date, the group has agreed £1.7 billion of deals, comprising £600 million in the first half and a further £1.1 billion in July and August alone, therefore eclipsing last year’s £1.5 billion in just eight months. The Life business also had a successful half, with AOP climbing by 9% to £375 million.

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The combined efforts of AM and Life led to record interim profits for M&G, where AOP rose by 15% to £435 million, ahead of the £429 million which had been expected. Cost savings continue to have an impact on the overall financial health of the group and the numbers are proof of the increasing strength. AUMA for the group spiked by 9% to £387 billion, reflecting those hard-earned wins.

Meanwhile, the Solvency II ratio, or capital cushion, rose to 247% from a previous 230%, which in turn enabled an increase to the dividend. This has been a key attraction of the stock over recent times and the projected yield currently stands at 6%, a compelling invitation to income-seekers in particular.

Spun out of Prudential in 2019, there are unsurprising similarities between the two businesses to this day. Large addressable markets, changing savings trends as part of retirement planning and a strong balance sheet each provide firm springboards for prospects. The circular relationship between Asset Management of a large part of the insurance business enables a certain visibility of earnings over the longer term. Indeed, the group’s store of future profit, including the CSM (Contractual Service Margin) is a measure of profit which will be released over time given the nature of investment and insurance products. In this period CSM rose by 6% to £7 billion.

There is of course a wider cloud which has hung over the group, relating to concerns over the ferocity of competition at the retail level, with the possibility that stubbornly high interest rates could entice savers to switch back to bank deposits, while wider consumer spending pressure could see savings sacrificed temporarily as increasing energy and mortgage payments bite.

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However, these seem to be issues which have yet to surface given the strength of this update. The more recent progress has been reflected in a share price which has risen by 30% over the last year, as compared to a gain of 17% for the wider FTSE100, and by 66% over the last two years, including a new record high in July from which the price has marginally retreated.

The slowdown in capital generation due to certain financial requirements elsewhere within the group is a disappointment and may explain the dip in the share price at the open. However, there is more broadly the appealing combination of inflows and BPA growth which have flown past estimates, an ongoing focus on costs, larger exposure to overseas markets via the Dai-ichi partnership and a generous dividend yield. Taken together, these could result in a market consensus upgrade, where the current general view of the shares is a hold, albeit a strong one.