M&G attempts a long-term transformation

The market gave a cautious thumbs up to the first anniversary of Andrea Rossi’s appointment as chief executive at the asset manager and legacy insurer M&G (MNG) after a solid set of half-year results, but with the caveat that comparisons were difficult to make after changes demanded by IFRS 17 accounting rules placed the emphasis on maintaining stable solvency levels.

The task is also made complicated by the fact that reported profits are affected disproportionately by short-term swings in investment values, which is why a £1.14bn half-year loss in 2022 can swing back into a modest £101mn profit in this half. For the purposes of clarity, it is fair to say that the 30 per cent rise in adjusted operating profit to £390mn was more indicative of the company’s overall progress.

Still, after years of relative underperformance in terms of asset flows – made bearable for investors by the capital the company has returned in its first three years as a listed entity – the results showed signs that corporate actions by its new management were starting to have an effect. While escaping the legacy of its heritage insurance business is going to be a long-term project, management still sees the future of M&G as being built around the higher fees and stable earnings of an enlarged wealth management offering.  

Operationally, there seemed to be a turnaround at the group’s asset management arm on the back of M&G broadening its appeal to international wholesale investors – wholesale net inflows were £1.3bn for the half. Overall, that meant a slight improvement in fee-based revenue, which ended the period at £507mn.

Meanwhile, rising yields because of better interest rates meant that the heritage insurance business was surprisingly strong – adjusted operating profits here rose by 34 per cent to £279mn, with the traditional with-profits business putting in a robust performance on the back of retail investor demand. While management’s ambition is essentially to run-off the insurance book, it is a still an important component in its ability to generate capital for investors.

Consensus forecasts give M&G a perfect 10 for price/earnings for this year, plus a dividend yield of 10 per cent, as well. The company divides opinion over whether its transformation plan is viable when it depends so heavily on its legacy business. However, the operational performance after a year of new management is solid and the dividend is an enticing patience payment. Buy.

Last IC View: Buy, 220p, 9 Mar 2023