- China's Omicron response impacts new business
- Central costs pull back markedly
Prudential (PRU) hasn’t been subject to criticism of its corporate governance in the same manner as FTSE 100 stablemate HSBC (HSBA), but where their businesses do overlap is their focus on Asia Pacific markets, especially China.
The Far East presents tremendous opportunities, but the Chinese government’s obsession with eradicating Covid-19 has stifled business – and matters are far from settled on the clinical front. Authorities in Beijing are now racing to stamp out Omicron outbreaks in the tourist hubs of Tibet and Hainan. It’s like a viral version of whack-a-mole.
For Prudential, the costs are real enough. The border with Hong Kong remains closed and the Chinese Mainland contribution to Hong Kong’s total new business profit was virtually zero in the first half of this year, against profits of $694mn (£573mn) in the matching period in 2019. New business profit in Hong Kong fell by 31 per cent to $211mn, while an IFRS net earnings loss of $613mn contrasts with an interim profit of $441mn in 2021. Group profitability was constrained by increased interest rates on bond asset values and on the valuation interest rates used for policyholder liabilities, along with decreased equity values.
The impact of the virus wasn’t restricted to China and Hong Kong. Several other Asian markets faced disruption, although restrictions eased significantly through the second quarter. Given the extent of regional challenges, it is difficult to assess how the group has performed overall. However, there are certainly some encouraging aspects. The insurer recorded a 9 per cent increase in annual premium equivalent sales to $2.21bn, with growth recorded in nine of the group’s 12 Asia life markets and across all four of its product categories. Taiwan, India, Vietnam and Africa all delivered double-digit sales growth and the group’s customer retention rate came in at 90 per cent, a slight increase on the 2021 comparator.
The lingering effects of the pandemic also make it difficult to gauge how the evolution of the group structure is progressing, specifically the impact of the split from its US operation, Jackson Financial. Central costs were down by nearly a third, largely due to the $2.25bn debt reduction programme, although the group booked restructuring costs of $154mn.
Full-year performance is likely to be impacted by increased macroeconomic volatility, along with further pressure on equities indices and increases in government bond yields. It would be unwise to rule out more restrictions from Beijing to curb the spread of the virus, so conditions are far from ideal. Nevertheless, we still maintain that the group is well placed to exploit the long-term growth potential of Asian markets, so we reiterate our buy call with the shares trading at a 36 per cent discount to the consensus share price target. Buy.
Last IC View: Buy, 1,095p, 9 Mar 2022
| PRUDENTIAL (PRU) | ||||
| ORD PRICE: | 986p | MARKET VALUE: | £27.1bn | |
| TOUCH: | 986-987p | 12-MONTH HIGH: | 1,566p | LOW: 881p |
| DIVIDEND YIELD: | 1.5% | PE RATIO: | 26 | |
| NET ASSET VALUE: | 586¢* | GMCR RATIO: † | 548% | |
| Half-year to 30 Jun | Gross premiums ($bn) | Pre-tax profit ($bn) | Earnings per share (¢) | Dividend per share (¢) |
| 2021 | 11.5 | 1.26 | 40.9 | 5.37 |
| 2022 | 12.2 | 0.30 | 3.80 | 5.74 |
| % change | +6 | -76 | -91 | +7 |
| Ex-div: | 18 Aug | |||
| Payment: | 27 Sep | |||
| £=$1.21. *Includes intangible assets of $909mn, or 331¢ a share. †Group Minimum Capital Requirement | ||||
