Insurance giant Prudential [PRU] releases annual results next week at a time when investors are putting pressure on the firm to split its Asian and US businesses. How will Prudential’s share price respond?
Prudential is under pressure. Its share price has dropped 22.8% in the year to 10 March, following the strain of the long-running US/Chinese trade tensions and the demerger of M&G – its former UK fund management and insurance arm – which completed in October 2019.
Prudential’s share price is likely to be affected by a further mooted restructuring, too. Activist investor Third Point wants the life insurer to now sell its US arm, Jackson National Life, because of a lack of synergies between it and Prudential Corporation Asia. Jackson National Life is said to be worth between $6-$10bn.
“Prudential PLC’s two separately managed franchises have distinct strengths but share no discernible benefit from being operated under the same corporate umbrella,” Third Point said in a letter to the board in February.
The Prudential top brass is expected to comment on this proposal when it releases its full-year results on 11 March, but chief executive Mike Wells has already said that “nothing is off-limits”. So at a time of such upheaval, should investors expect a post-earnings share price bounce?
What’s Prudential hoping for in full-year results?
Turning to operational matters, the insurer will be looking to build on its solid half-year results which saw group operating profit climb 14% to £2bn. Both of its divisions did well with both Asia and US operating profits up 14%. Its dividend rose 5% to 16.45p.
Prudential sees continued future growth, particularly in Asia and emerging markets as a growing and increasingly wealthy population, boosts demand for insurance cover such as health and life.
Analysts are also bullish that this strong performance will outlive any headwinds the firm may be experiencing now. On Market Screener, the mean consensus for the share price is outperform with an average share price target of 1,599p, representing a potential 42% upside on 10 March’s price of 1,130p.
According to Simply Wall Street, Prudential’s earnings over the next few years are expected to increase by 67%. “This should lead to more robust cash flows, feeding into a higher share value,” it said.
|PE ratio (TTM)||6.20|
|Quarterly Revenue Growth (YoY)||2.20%|
Prudential share price vitals, Yahoo Finance, 10 March 2020
Prudential’s elephant in the room
The question of continued restructuring, however, is one analysts and investors will want the upcoming announcement to shed more light on. On 8 March, The Sunday Times reported that Prudential was already lining Jackson up for sale; rumours the insurer has not confirmed.
While some Prudential shareholders seem keen on pursuing Third Point’s idea, other investors warn that it is too early for another fundamental remodelling. They believe a sale of Jackson at such an early stage of its post-demerger existence could mean missing out on lots of valuable upside going forward.
"Prudential can take little steps here, they don't have to race into a sale, they just have to begin with something," said Reiner Kloecker, fund manager at Union Investment.
“Prudential can take little steps here, they don't have to race into a sale, they just have to begin with something” - Reiner Kloecker, fund manager at Union Investment
"It's much more important to us that they get rid of the US business at a sensible valuation over time.”
G A Chester in the Motley Fool said the demerger of M&G is also positive for the stock as “such splits often deliver value for shareholders in the long run”. He echoes Third Point, which believes that Prudential shares could double within three years if the businesses are split further.
Break up and make money
Analysts at Deutsche Bank agree, recently upping its rating on Prudential to buy from hold.
“In our opinion, a break-up of Prudential is logical. Though not a new concept, this is the first time that pressure is coming from an aggressive activist investor. There is upside in the event of a demerger to between 1600p to 1800p or – even if there isn’t – that recent share price weakness offers a buying opportunity,” it said.
“In our opinion, a break-up of Prudential is logical. Though not a new concept, this is the first time that pressure is coming from an aggressive activist investor” - Deutsche Bank analysts
Prudential has a lot of levers set to boost company performance, ranging Asian growth, a potential boost from the coronavirus epidemic as nervous people look to health and life insurance products, and a future decoupling that could propel its share price higher over the mid- to long-term.