Prudential: promising evidence emerging on firm’s ambitious targets

There is some promising evidence emerging that Prudential (LSE:PRU) is beginning to deliver against its own stretching strategic objectives.

The group’s stated aims by 2027 are punchy, including new business profit growth of between 15% and 20% annually, but even at this early stage Prudential is confident in achieving these goals. Indeed, the outlook comments mention that the momentum seen so far this year is carrying over to the second half and that new business profit is in line with its objectives.

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The new business profit figure for the period came in at $1.47 billion, which represented a decline of 1%, but which was above expectations. The reason for the decline is mainly due to extremely strong comparatives, given that this time last year China released its pandemic restrictions and opened its economy once more. In turn, this meant that visitors from mainland China to Hong Kong returned almost to normal levels, which automatically boosted the company’s trade and profit in that region.

Adjusted operating profit also increased steadily by 6% to $1.54 billion, driven by an increase of 6% in its long-term insurance business and growth of 8% from its Asian-based investment arm, Eastspring. In terms of the latter, funds under management rose from $237.1 billion to $247.4 billion, with large inflows from retail clients in particular more than offsetting some negative foreign exchange effects and institutional outflows elsewhere. This structure also allows for some of the virtuous circle of new funds being managed separately to benefit the group as a whole, with an improving trend towards equity funds being another area of promise.

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There was a slight miss for annual premium equivalent (APE) sales, which grew by 6% to $3.11 billion, but came in slightly shy of estimates. Again, the Hong Kong comparison effect was a major headwind on the number, but in terms of the massive Asian and African regions on which the group is fully focused, there were strong showings from the likes of India, Singapore and Taiwan, underlying the group’s ability to benefit from a sprawling geographical footprint.

The free surplus ratio of 232%, as compared to 242% at the end of last year, is comfortably ahead of the group’s target range of between 175% and 200%, which potentially augurs well for further shareholder distributions. While Prudential is not traditionally known as a group where the dividend payment is a shining light – indeed, the 9% increase announced takes the projected yield to a pedestrian 2.4% - the $2 billion share buyback programme is now underway and there is the strong possibility of more to come should the current metrics stay in range.

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Elsewhere, the focus on digital distribution and the move towards more technology-based solutions continues apace, such as the increasing use of advanced analytics and AI for higher value purposes, which is being selectively trialled. Less positively, and from a broader perspective, heightened geopolitical tensions between the West and China cannot be overlooked, with Hong Kong the group’s biggest single country of profit generation during 2023 at close to $1 billion. Competition across its markets persists, while costs for businesses are remaining generally elevated.

Such tensions, alongside the economic clouds which have hung over China in particular more recently have had a detrimental effect on the share price for Prudential, if not for its long-term prospects. The shares have fallen by 30% over the last year, as compared to a rise of 11.8% for the wider FTSE 100 and have now dropped by some 57% over the last three years in a painful reminder of the ground which needs to be recovered. Nonetheless, this lag in the share price has seemingly strengthened the resolve of bulls of the stock, who remain highly confident of the group’s ability to grow margins and profits in a sustainable way. As such, the market consensus of Prudential not only as a buy, but also as a core portfolio constituent, is likely to continue.