Why Prudential shares are worth £20

As the dust settles on Prudential's latest impressive results performance, is a record £20 a share now a real possibility for the insurance giant?

Broker UBS certainly thinks so, having just reiterated its 'buy' rating and lifted its price target by 8% following yesterday's results, when chief executive Mike Wells announced a record operating profit of £4.26 billion for 2016.

Eamonn Flanagan, analyst at Shore Capital, went as far as to describe the numbers as "astonishing", adding that they demonstrated the quality and scale of the business.

As expected, Asia continued to be the driving force following a 28% surge in profits. With the region's rapidly growing and underinsured middle classes a lucrative market, the Pru has now achieved double-digit growth in new business profits and capital generation for seven years in a row.

Overall, UBS analyst Arjan van Veen sees Prudential's Asian division as a quality franchise with "compelling exposure" to long-term structural growth markets - something deserving a premium valuation versus the company's peers.

Factoring in the 2016 results, UBS has increased its earnings estimates by 5-6%, believing earnings and cash can grow sustainably at double-digit levels.

Pushing its price target up to £20 from £18.50 previously, implies another 16% upside on a current share price already trading at close to the record high set two years ago.

Backed here at 1,697p yesterday, Pru shares peaked at 1,758.5p Wednesday, just 3p shy of a new record high.

Barclays also remains optimistic about further progress, having highlighted the group as its top pick in the European insurance industry and slapping a price target of 1,844p on the shares. It noted that Prudential is trading in line with the sector, with a forward price/earnings (PE) ratio of 12 times.

Analyst Alan Devlin added: "The key takeaway from management was that Prudential's second half performance was much stronger than H1 with many of the headwinds becoming tailwinds."

The underlying performance in Asia is improving, with 20% growth in eight of its Asian countries in the second half, and the momentum continuing into 2017. The regulatory environment in the US has also moved into the Pru's favour in recent months.

Devlin noted that the company is often unfairly benchmarked with UK life insurers, even though the UK now only contributed 17% of full-year earnings.

The Pru's Asia expansion has seen it capture top-three positions in nine of its 12 life markets in the region, as well as become the number one Asian retail asset manager. Life insurance sales exceeded £1 billion for the first time in the final quarter of 2016.

It is tapping into a market with low insurance penetration, high out-of-pocket healthcare spend and rapidly growing private wealth. Hong Kong has been a particularly lucrative market, although there are fears of a potential clampdown on capital outflows by Beijing authorities.

Elsewhere in the business, the Pru grew US operating profits by 8% to £2billion but there was disappointment in the UK after profits fell by 32% to £799 million.

This reflected the company's withdrawal from the bulk annuity market and a £175 million provision to cover the cost of undertaking a review of past non-advised annuity sales practices and related potential redress.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.