Morgan Stanley trims target price for Prudential, but reiterates 'overweight'

Analysts at Morgan Stanley trimmed their target price for shares of Prudential but reiterated their 'overweight' recommendation for the stock ahead of its de-merger into an asset manager to be called M&G Pru and an insurer focused on the UK, US and, above all, Asia.

In particular, they highlighted how its shares had "materially" underperformed their hypothetical 'sum-of-the-parts' valuation for the business as well as its domestic peers - despite the drop in Sterling.

They believed exactly the opposite should be expected to occur.

In their opinion, the reasons for the stock's recent underperformance included the 'execution risk' around a potential de-merger, poor sentiment towards emerging markets and negative earnings for Pru.

Linked to the execution risk around the split of the two businesses, Morgan Stanley said, was the increased uncertainty around how the market will value the two sucessor entities.

On an IFRS basis, the broker's earnings estimates for fiscal years 2018, 2019 and 2020 were trimmed by 0.4%, 2.6% and 1.2%.

"Although our price target only changes modestly, it is now set at end FY19, rather than end FY18 so implicitly has reduced by ~8% (from 2,481p to 2,469p)," they said.

There were risks of course, the broker said, including a potential worsening in credit conditions, continued challenges in emerging markets, and changes in competitive conditions and regulation in key markets.

"While it and indeed our base case valuation are heavily dependant on EV metrics, we believe that Pru has a good long- term track record in setting assumptions and has also shown that its EV does act as a leading indicator for IFRS earnings and cash."