Interactive Investor

Prudential's UK merger sets tongues wagging

10th August 2017 13:14

Lee Wild from interactive investor

Prudential's Asia business was behind a cracking set of first-quarter results in March which triggered a wave of profit upgrades. And it's the Far East that's driven a surge in profits in the last three months. Plans to merge M&G and Prudential UK & Europe have also set tongues wagging that this is a prelude to a sale of Pru's UK operations.

Double-digit profit growth in Asia and a strong performance in the US had half-year operating profit up by 5% at constant exchange rates to just under £2.4 billion. Convert all those overseas profits back into a weak sterling, Pru's reporting currency, and actual profit was up 15%.

Asia's rapidly growing and underinsured middle class is a lucrative market for Pru, and it's a long-term structural growth story, not some flash in the pan. Nearly 700 million people there will join the middle class over the next five years, and research puts the so-called "protection gap" at $45 trillion.

After a 40% rally since Trump's US election victory, there's a lot of talk about Prudential shares hitting £20. The valuation does not yet look stretched based on current profit forecasts, and Pru shares are down by far less than the wider market Thursday.

 

However, there are indications that buying is drying up, according to technical analysts, which does increase the likelihood of a correction sometime soon.

Selling the UK business could prevent that. It's something the company has been mulling over in private, and cutting loose the underperforming domestic operations, where Pru no longer writes new annuity business, could stick a rocket under the share price.

News today that the M&G asset management business will merge with its Prudential UK & Europe life insurance operation adds fuel to the fire that this is preparation for an eventual sale.

"Combining these businesses will allow us to better leverage our considerable scale and capabilities," chief executive Mike Wells tells us. "This will enable us to increase our growth prospects by providing better outcomes for our millions of customers."

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.