Prudential (PRU) investors have received another FTSE 100 holding in their share portfolios. Following approval earlier this month, and after more than a year of planning, the financial giant this week de-merged its UK-focused asset management arm, M&G (MNG), allowing it to focus on rapid growth in Asia and the US. For every Prudential share owned, investors were handed one in M&G.
The split was met with a tepid market response. Shares in the trimmed-down Prudential closed their first day of trading down 9 per cent, while many investors appeared to take their first opportunity to cash out of M&G, pushing the new group down from 220p to as low as 201p on Tuesday. That debut was well below the bottom range of analysts’ valuation estimates, though with several questions over M&G’s strategy and how to value the stock, the reaction was perhaps understandable.
Though the campaign for a split has been ongoing for some time, only time will answer whether the benefits of its £355m price-tag will have mainly accrued to professional advisers. A more immediate concern is whether M&G’s insurance and asset management divisions fit together.
“On the face of it, M&G doesn’t look like a stock to get excited about,” opened Exane BNP Paribas' 58-page initiation note. “After all, it’s a fixed-income focused asset manager with a run-off insurance business.”
That epithet is reflected in the group’s key figures: of its £341bn assets under management, just £210bn of those funds are in M&G Investments and its Prudential-branded retail savings franchise. The remainder sits under the now-closed Heritage insurance business, which includes shareholder-backed annuities and with-profits funds.
At a recent presentation, chief executive John Foley acknowledged that investors frequently ask him why they shouldn’t simply own shares in a "pure-play" asset manager and a closed-book consolidator. His answer is threefold: that the Heritage insurance book smooths the cyclical nature of asset management earnings, strengthens the balance sheet for dealmaking and investments on behalf of asset management clients, and provides management with some sought-after assets to potentially trade.
That sales pitch would have been made easier had the asset manager’s fund flows not declined in recent years. Though Mr Foley can point to supportive demographic shifts and rising savings requirements, Exane BNP analysts reckon positive UK retail fund flows have dropped to 1.8 per cent per quarter since the EU referendum. Previously, quarterly flows were an average 3.1 per cent.
So how should we value M&G? The easiest way is to look at its near-term target of £2.2bn total capital generation in the three years to December 2022, alongside a pledge to pay an 11.92p per share dividend for 2019 and a one-off special £100m (3.85p a share) “demerger-related dividend”. At 204p a share, that puts M&G on a yield of 7.7 per cent for the current year, rising to 9.1 per cent for 2020 and 9.7 per cent in 2021 based on Bank of America’s projections for dividends of 18.6p and 19.7p per share in each of those years.
Exane BNP, which like BoA rates M&G a ‘buy’, expects shareholder returns to be similarly high, and supported by a 6.8 per cent compound annual increase in profits from the asset management division over the next four years. Yet the brokerage thinks the run-off in the Heritage business will lead both group earnings and total capital generation to decline until 2022, when it forecasts post-tax profits will begin rebounding, and hit £715m.
