There are always many different shares to write about but I am surprised that I haven't troubled these pages with my thoughts on the Prudential (PRU). As a self-confessed investment geek typically focused on longer-term themes and trends, there are few corporate names in the FTSE-100 as well set up as the Prudential with its growing exposure to the burgeoning Asian insurance market, a region where the last ten year renewal premium compound growth rate for the company has been a cool 18% and profits have grown even faster. No surprises to see this as regions that are growing, urbanising and becoming wealthier demand more insurance. And the Pru has a very good position across countries such as Hong Kong, Malaysia, Indonesia, India and (more recently) China. It has also not been shy in building exposure in Africa too. Mix this in with a lengthy participation in the UK and US markets and in last week's update the company said it had 26 million customers, over £650 billion of funds under management and (even more amazingly) potential access to 4.2 billion of the world's population...
Insurance is though an opaque sector but the good news for the Pru is that cash flows tend to be back-end loaded i.e. much of the customer acquisition and general cost and related tends to be in the earlier part of an insurance relationship and certainly my studies of the space have suggested some correlation between writing quality business one year and seeing boosted cash flow generation capabilities a few years later. Insurance names often refer to 'surplus' and it is fascinating to see in the company disclosures that the longer-term growth in free surplus, new written premiums and operating profit are all congregating around the same proportional levels.
Now you can do quite a lot with the £4 billion odd of surplus the company generated in 2018 but I like that the Prudential is not just sitting still and counting the cash. The more I look at business, the more I realise that the best corporate names keep the internal energy quotient high. In the Pru's case it is forcing through a regional and operational split. Last year the demerger of the fund management arm M&G Prudential was announced - as well as the proposed sale of the UK book of business - to allow the continuing Prudential share to be focused on the cash generative US market and the growth markets of Asia and Africa. This is progressing to plan and as with many spin-offs and related may induce opportunities to create value as global investors start to respect the sum-of-the-parts a bit more.
Given a choice here and now, I would much rather have the continuing Pru business which accounts even today for getting on for three-quarters of the surplus generation and in a few years time will be in an even better position. However a little bit of geek maths using the Pru's current market cap of £42 billion as a base, suggests to me that the M&G spin-off should be worth £12 billion+ (2% of AUM) and as a quarter of the business, the overall group should have a market cap more like £50 billion. I can handle a 20% rise in the share price assuming a fair global wind (and I admit that is an assumption) which would suggest a move back to the 19 quid odd levels of not so long ago. Simply put - with a share like the Prudential (which also has a justifiable dividend yield of 3%) snaffling a few now and at each new pound below the current share price (£15 something a share, £14 something a share) is a suitable compromise between opportunity and the short-term perception vagaries towards the insurance space. Buy.
Filed under: Prudential, Simon Hume Kendall, London Oil & Gas, Bluejay Mining, Netscientific, Verseon, Woodford
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