EUR 850.00 For Business Accounts Only

Morningstar | Prudential First Half: U.K. Weakness; Shares Overvalued

Prudential reported first-half 2018 IFRS operating profit of GBP 2.4 billion. This is above our estimates, but as we still believe the business does not benefit from competitive advantages, we are maintaining our GBX 1,690 per share fair value estimate and no-moat rating.

The results were relatively broad-based, though the United Kingdom asset management business that Prudential is looking to separate posted lower net inflows. The strongest of the group’s businesses, Jackson, in the United States, posted a 10% increase in variable annuity separate account deposits on June 30, 2017. This led to a 13% rise in fee income. However, the business unit did encounter lower spread-based earnings, and combined with higher amortisation of deferred acquisition costs, these dragged on the 2% higher operating profit.

As for the long term, Asia has been the driver of earnings growth. Prudential Asia continues to focus on health and protection. With a just over 10% increase in new business value, and a 4% decline in average premium equivalent, the better profitability reflected sales mix, pricing actions, and ranking regular premium for health and protection. Eastspring, Prudential Asia’s asset management arm, also continues to do well, posting a double-digit rise in operating profit.

The negative seems to be the United Kingdom. While management has outlined that preparation for the separation of M&G Prudential is progressing well, net flows show otherwise. While to some degree this can be expected, as uncertainty generally creates withdrawing of money, the magnitude within M&G is higher. Net inflows declined from GBP 7.2 billion to GBP 3.5 billion, though PruFund net inflows were relatively flat at GBP 4.4 billion. Anne Richards has announced her resignation as CEO of M&G in August 2018.