Tip Update: Buy at 1,247p
- Tip style
- VALUE
- Risk rating
- MEDIUM
- Timescale
- LONG TERM
- Our previous tip
- We said BUY at 1,129p on 06 May 2020
- Tip performance to date
- +10%
Prudential (PRU) has taken a significant step towards a separate listing of its US life insurance business Jackson, after receiving a $500m (£400m) equity investment from reinsurer Athene.
The stake was announced alongside a major deal which sees Athene fully re-insure Jackson’s $27.6bn in-force fixed and fixed indexed annuity portfolio. Prudential said the combined effect of the two transactions will add 80 percentage points to Jackson’s capital cover ratio.
Athene’s cash-based investment will give it an 11.1 per cent economic stake in Jackson and 9.9 per cent of the voting rights. On a pro-forma basis, that gives the business a valuation of $4.5bn, or less than two times’ RBC’s earnings forecast for 2021.
Despite this low multiple, the stock rose on a development which marked a clear indication of market appetite for a standalone US business. In February, shareholder and activist hedge fund Third Point wrote to Prudential’s board to press for a spin-off of the unit. Within weeks, the FTSE 100 group acquiesced, confirming that plans for a minority initial public offering of the division had begun.
Prudential said preparations for a minority listing would continue “alongside an evaluation of other options”.
IC View
Athene’s equity stake sets an initial marker for Jackson’s valuation, though the reinsurance element of this deal means its economic interest in the business is much larger. As such, it is not unreasonable to place greater credence in RBC’s 459p-a-share valuation for the division. That’s some welcome news for shareholders amid recently renewed concerns over Prudential’s bet on Hong Kong and China. With the income case intact, the break-up value (1,129p, 6 May 2020) here still has appeal. Buy at 1,247p.
Last IC View: Buy, 1,129p, 6 May 2020
