Prudential's M&G plans 'progressing' as growth driven by Asia

Prudential said the planned split of its UK from its Asian and US businesses was "progressing well" in a half-year that saw profits hit by currency swings but still beat expectations thanks to one-offs.

Boosted by good underlying growth in Asia and the US, group operating profits rose 2% to £2.4bn in the first six months of the year on an IFRS accounting basis, or up 9% if forex moves are excluded. This was 7% ahead of the average analyst forecast of £2.25bn, thanks to a £166m benefit from the one-off release of a UK provision.

IFRS profit after tax fell 10% to £1.4bn and although net cash remittances from business units also fell 10% to £1.1bn, driven by lower remittances from the US and the UK, the first interim dividend was lifted 8% to 15.67p per share.

New business sales were down 8% to £3.3bn, in line with consensus expectations, but new business profit was up 5% or 13% at constant currency to £1.77bn thanks to stronger Asia margins, which was better than expected.

Chief executive Mike Wells said the spin-off of M&G Prudential, the group's UK-headquartered business focused on savings and investment at home and in Europe would see both business remain in the FTSE 100 once the process is complete, which is expected to happen in 2019 or 2020.

M&G saw inflows of £3.5bn in the first half, down from £7.2bn last year, while PruFund saw roughly flat net inflows of £4.4bn.

After the split, Prudential Plc will continue to be headquartered and listed in London, but will be regulated by the Hong Kong Insurance Authority rather than the UK’s Prudential Regulation Authority.

Wells said the demerger "demonstrates our commitment to creating shareholder value" and, with M&G management team recently announced, added "we are making good progress".

Looking at the performance of the whole group in the half-year just ended, he said it was again led by Asia, contributing to an 9% constant-currency increase in group operating profit, plus growth in underlying free surplus generation of 6% and an increase in new business profit of 13%.

Asia overtook the US as the largest contributor to group profits as it new business profits grew 11% at constant currency, with IFRS operating profit up 14% at constant currencies and underlying free surplus generation up 14% at constant currencies. US variable annuity separate account assets grew 10% at constant currencies or 9% at the reported level, leading to a 13% increase in fee income, but just 3% at actual exchange rates.

Earnings per share increased 10% on an IFRS basis to 76.8p, or up 20% on an European Embedded Value basis to 133.8p.

MARKET REACTION & ANALYSIS

Prudential shares fell 1% to 1,741p on the release of the results, but struggled to find direction for the hour thereafter.

UBS said profits would have been in line with the consensus forecast were it not for the one-off release of the UK provision.

"Overall, mixed but robust numbers despite sales headwinds and we expect a small positive reaction," analysts said in a note to clients, noting that Hong Kong sales were down 11%, with Asia growth excluding-HK down 1% at constant FX.

"While sales growth was lower in 1H18, a shift in channel mix in HK and a tough regulatory backdrop in China need to be factored in. Asia new business margins improved significantly (from 56% 1H17 to 65% 1H18) due to business mix shift in HK, to drive new business profit up 13%, with Asia (+11%) 7% ahead of cons, US (+17%) and UK (+11%) evidencing double-digit NB profit despite sales headwinds."

With Asia overtaking the US as the largest contributor to group profits and the demerger of the M&G progressing, broker Hargreaves Lansdown said it was understandable why rumours have started to swirl that rival insurers might be interested in picking up the jewel in Pru’s crown when it goes it alone.

"The Asian business has strong positions in rapidly growing emerging economies, many of which have little or no welfare state. That’s made private protection products increasingly important as the populations of those countries grow wealthier, underpinning double digit profit growth year after year, with insurance profits are up 22% in China this half for example. Pru is focussed on products that deliver recurring premiums, like health and life insurance, which should weather an economic downturn better than single purchase products," HL said.

"That growth potential is reflected in a valuation that’s some way above the other UK life insurers though, and with the demerger still way off completion, investors might want to wait until they can get a clearer shot at the Asian business once the split is complete.”

Fellow broker Interactive Investor noted that the shares have fallen 2% over the last six months and have dropped 6% over the last year, during which time the wider FTSE100 has added 2.5%.

"This contrasts sharply with the general view of the shares at the moment, with the mere possibility of Prudential being able to capitalise and concentrate on its strongly growing Asian and US businesses enough to maintain the consensus of the shares at a strong buy,” analysts said.