Wednesday preview: Prudential results may be 'drab' but show potential

Down around 14% since the start of the year and with investors keen to hear more details about management's plans for a de-merger of its UK and European business, Prudential's half-year results look the ones to watch on Wednesday.

The first six months of 2018 are likely to have been fairly tough for the FTSE 100 group, though with March's plan to spin off the European savings and investment businesses as M&G Prudential, leaving an international insurance group focused on Asia, the US and Africa, with both businesses seen as potential beneficiaries of positive long-term trends, the shares are still on many investors' watch lists.

Deutsche Bank sees the shares as having been held back by "general market nervousness as well as a range of bottom-up issues", including the impact of regulatory and tax changes on the group's US capital ratio, declining HK sales and "a broader sense that Prudential will struggle to deliver much profits growth over the next two years" thanks to FX and exceptional items.

The German bank's analysts expected these numbers as likely to appear "quite drab", with flat sales growth in Asia and the US, currency headwinds and flat profits year-on-year, but think the underlying growth trends are intact and with forex moving more in the company's favour "recommend buying ahead of the results".

Analysts at UBS said the result is "likely to be challenging" given significant currency headwinds on US and Asia earnings and weak sales trends in Hong Kong, which represents 45% of overall Asia sales and 65% of Asia new business profit. The forecast £2.4bn in operating profit, operating EPS of 73p and interim dividend of 15.7p per share, equal to one-third the last year's total dividend.

USB will be looking for more detail on the financials and timing of the M&G spinoff and reassurance around the US capital position given new proposals to change regulatory capital standards for variable annuities.

"The decision to split Prudential into two companies with different goals seems a good one on first glance, but has left us with a few questions," said broker Hargreaves Lansdown. "The first business is a life insurer targeting the US, as well as the growing middle classes in Asia. It should be a solid foundation for rapid growth.

"With the second, a mature UK/European life insurer and asset management company, you’d expect slower growth, but with potential for a consistent dividend. Management should be able to focus on the separate aims of each of the businesses."

Wednesday will see a barrage of other large and mid-cap companies reporting results, including Bellway, Glencore, Hastings, Morgan Sindall, Paddy Power Betfair, Pagegroup, Spirax-Sarco and TI Fluid Systems.

Glencore's production results at the end of last month were slightly ahead of expectations, with full year volume guidance left largely unchanged, apart from coal and lead being lowered. Earlier in the month the company unveiled a share buyback programme of up to $1bn to run over the rest of the year, which has helped put a floor under shares that had fallen around 19% since the start of the year amid a spate of legal battles and an investigation launched by US authorities into the company's business in Africa.

Deutsche Bank first-half EBITDA forecast of $8.5bn is unchanged with lower sales offset by higher production volumes across the rest of the business, with analysts not expecting any material changes to guidance for capex and unit cost.

The last update from Bellway's showed that trading continues to progress well with guidance left unchanged.

While the housebuilder's directors mentioned that trading conditions for higher priced properties was more challenging, broker Numis said Bellway’s modest exposure to this part of the market and management’s inherent conservatism, "makes us believe that the risk to estimates lies on the upside for 2018/19" and that the Bellway is "undervalued relative to its peers and prospects".

Numis also saw good scope for recovery in Hastings shares if the insurer reports robust interim results. Analysts forecast first-half PBT to be broadly flat on the prior year with premium income growth offset by cost growth and the impact of adverse weather in the first quarter.

"The early part of this year was the first time as a listed company that Hastings had experienced a softening rate environment. It will therefore be interesting to see how resilient the company’s performance has been during this period. We expect growth in policy numbers to have slowed to 8%, down from 12% in 2017, reflecting more difficult market conditions, However, given previous guidance we assume underwriting margins have been broadly maintained, with a combined ratio forecast of 88% and a calendar year loss ratio of 74.9%."

Broker Peel Hunt forecast a 6% cut to the interim dividend to 3.8p per share as Hastings first-half PBT drops 26% to £51m, with EBITDA down 15% to £73.8m. This is largely driven by the impact of the poor weather during the first quarter and the balance largely explained by lower underwriting results on the back of higher expenses and lower profit commissions.

Analysts assumed a 97.6% CoR on a Hastings basis including 5%-points of bad weather impact vs 88.9% during the same period last year and expect an overall EBITDA of £10m.

With policy volumes sees declining 2% from year end and up 5% year-on-year as the company reacts to a softer market environment at the beginning of the year, Peel Hunt said, "It will be interesting to hear how HSTG’s rates have developed relative to the claims inflation across its portfolio and what the outlook is for rates in the second half of the year; particularly after suggestions from both [Direct Line] and Sabre that they were likely to increase rates and track rising claims inflation during H2 2018."

Economic data to watch on Wednesday includes Chinese trade figures out early in the morning along with a statement from Australia's central bank chief, with no major UK reports expected. US mortgage figures and oil inventories are due in the afternoon.

Wednesday 08 August

INTERNATIONAL ECONOMIC ANNOUNCEMENTS

Crude Oil Inventories (US) (15:30)
MBA Mortgage Applications (US) (12:00)

INTERIMS

Glencore, Hastings Group Holdings, Hill & Smith Holdings, Mereo Biopharma Group, Morgan Sindall Group, Paddy Power Betfair, Pagegroup, Prudential, Sampo OYJ, Secure Trust Bank, Share plc, Societatea Nationala De Gaze Naturale Romgaz S.A. GDR (Reg S), Spirax-Sarco Engineering, Stock Spirits Group , TI Fluid Systems

TRADING ANNOUNCEMENTS

Mereo Biopharma Group, SCS Group, TUI AG Reg Shs (DI), UDG Healthcare Public Limited Company

GMS

Puma VCT 9

SPECIAL DIVIDEND PAYMENT DATE

M Winkworth

AGMS

Bushveld Minerals Limited, Footasylum, Investec, Majestic Wine, Puma Vct 11, Puma VCT 12 , Puma VCT 9, TechFinancials (DI), Tongaat-Hulett Ltd.

FINAL DIVIDEND PAYMENT DATE

F&C Global Smaller Companies, JPMorgan Japan Smaller Companies Trust, Ventus 2 VCT, Ventus 2 VCT 'C' Shares, Ventus VCT, Ventus VCT 'C' Shares

QUARTERLY PAYMENT DATE

British American Tobacco, JPMorgan Asian Investment Trust