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Profits rise at Prudential

BROKERS TIPS: And the costs of Pru's bid for AIA are less than initially feared
August 16, 2010

What's new

■ AIA bid costs cut

■ Decent operating profit hike

■ Half-year dividend up 5 per cent

IC TIP: Hold at 567p

A 41 per cent year-on-year rise in Prudential's first-half IFRS operating profits to £968m went some way towards deflecting continuing shareholder dissatisfaction over the failed bid for AIG's Asian business, AIA. There was even some good news on that front - the £450m estimated cost of the aborted bid has been revised down to £377m.

Much of the better performance reflected a strong contribution from the group's in-force business, where profits rose 40 per cent to £861m. This has provided the capital to continue expanding in Asia, a region that chief executive Tidjane Thiam regards as the best area for growth. But the Asian operation - which now generates around a third of group operating profit - may face increased competition after former Prudential chief executive Mark Tucker was appointed as the new boss at AIA. When AIA lists on the Hong Kong stock exchange, probably later this year, the gloves may finally come off, with the two fighting for agents.

Operating profits were also boosted by a £123m gain on equity derivatives in the US business and the M&G asset management business saw net inflows of £4.4bn - although this was down significantly from £10.1bn a year earlier.

Credit Suisse says...

Outperform. First-half figures were generally better than expected and AIA deal costs have fallen. Moreover, while the 5 per cent dividend rise lags behind rivals, it allays earlier fears that the cost of the aborted bid would mean a cut. There were no management changes, much as we expected, although this may cast a shadow for those investors looking for change. Still, the shares look cheaply rated - the Asian business, for example, is trading on an implied eight times 2011's estimated IFRS profits, or around 50 per cent of embedded value. Our price target is 710p.

UBS says...

Buy. A strong first-half performance saw underlying operating profit on an IFRS basis grow 8 per cent, excluding US hedging gains. The AIA debacle hasn't affected operational performance, either, with a 56 per cent margin at the Asian business (on an annual premium equivalent basis) having easily beaten our 50 per cent forecast. The shares trade at a price to embedded value multiple of 90 per cent - our 641p price target is underpinned by a 718p sum of the parts valuation. Expect adjusted pre-tax profits of £1.57bn for the full-year, giving EPS of 44.2p.