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What’s next for Prudential’s share price after HY results and demerger update?

Prudential [PRU] share price surged in morning trading as half-year numbers saw operating profits continue to climb and growth in its Asian business. The UK’s biggest insurer also updated the market on its planned demerger. 

 

 

What happened in Prudential’s 2018 results?

In 2018's full-year results, Prudential's operating profits came in at £4.8 billion, up 6% from the previous year. Asian business was the big earner, where new business profit was £2.6 billion, up 14% year-on-year. Operating profits in Asia were also up 14%, coming in at £2.16 billion. For the full year 2018, the company rewarded shareholders by increasing the dividend 5% to 49.35p.

5%

Dividend increase in 2018 to 49.35p

 

 

What we were told to watch

Analysts at UBS expected £2.62 billion in operating profits for the first half of 2019, up 9% year-on-year. Again, growth in Asia was expected to feature heavily, with the region now Prudential's biggest profit earner since starting business there 20 years ago.

According to analysts at UBS:

“[Interim results will be] driven by Asia £1.1bn (up 20% year-on-year , +4% vs cons), US £1.28 billion (up 28% due to DAC benefit, +10% vs cons), UK £0.35 billion (up 65% due to management actions, +11% vs cons), M&G £0.25 billion (-8% y-o-y, in-line vs cons) and Eastspring £0.1bn (up 6% y-o-y, -4% vs cons)."

 

What's been happening at Prudential?

1.Boom in Asian business
 
Prudential generated 38% of its operating profit from Asia alone last year. The Asian business is now worth £25 billion and over the past five years operating profits have doubled to £2.1 billion. Driving this has been demand for savings and insurance products as individual wealth grows in countries like China. 
 

£2.1billion

Operating profits from Asia over the past 5 years

  
 
 
2. Share price hit by US-China trade war
 
Prudential's share price might be up 7% so far this year, but has since fallen due to the ongoing US-China trade war. First, Prudential invests heavily in markets which have not responded well to the latest souring in relations. Second, Prudential derives a large amount of its own profits from the Middle Kingdom.
 
 
3. Demerger talks continue
 
Prudential is nearing the completion of a complicated demerger where the company will split in two, creating a new £7billion FTSE 100 company in the process. Looking after the low growth but cash-generating UK and European operations will be M&GPrudential. For the high-growth US and Asia markets, Prudential PLC will call the shots. Investors will see their shares split between the two companies. 
 
Expectations were for the company to provide a timetable for the demerger during the half-year results.
 
 
 
So, what happened in HY 2019?
 
In the half-year results, operating profits climbed 14% to come in at £2 billion, ahead of analyst expectations. Operating profits in its Asia and US business were also up 14%, which seems to be the lucky number for Prudential. For income-seeking investors, the company hiked its dividend by 5% to 16.45p. 
 
On the proposed demerger, Pru said the plan is to list M&GPrudential as M&G plc later this year. According to Richard Hunter, head of markets at Interactive Investor, Pru is ‘likely to rule the roost post-demerger with the M&G business looking to define a growth path nearer to home’. Chief Executive Mike Wells says he now expects the separation to take place in Q4 2019.
 
Following the results, Prudential’s share price climbed 1.3% by mid-morning, before giving up those gains in lunchtime trading.
 
 
Market cap£37.46bn
PE ratio (TTM)12.34
EPS (TTM)116.80
Quarterly Revenue Growth (YoY)-67.80%

Prudential share price vitals, Yahoo Finance, 14 August 2019

 
Is Prudential a buy?
 
Prudential's current share price could be something of a bargain. Analysts’ expectations are that the company will deliver earnings per share of 151.7p for the full year, which would represent a x% upside. A lot will depend on how it executes its demerger and any let up in the spat between Washington and Beijing.
 
For income-seeking investors, the stock is forecast to payout 49p for 2019 at a 3.22% forward yield. The consensus rating for the stock is "Buy", while the average price target among analysts for the year is 2079p. This would represent a 43% upside on the current share price. All eyes are now on Q4 when Prudential’s merger is poised to take place and how the two FTSE 100 businesses complement each other.
 
 

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