Why Prudential spin-off could be 'extremely rewarding'

Having enjoyed the ride in Prudential shares to near the £20 mark, investors in the 170-year-old insurance giant will soon find themselves having to weigh up the prospects for two very different businesses.

The planned demerger of M&G Prudential, which is the company's recently combined asset management and savings arm, will leave shareholders holding two separately-listed businesses in the FTSE 100 Index.

Most would acknowledge that the split makes commercial and strategic sense, given the contrast between high-growth opportunities in Asia, the US and Africa and the capital-efficient UK & Europe savings and investment business.

Pru chief executive Mike Wells points out that following the separation M&G Prudential will have more control over its business strategy and capital allocation. This should enable it to play a greater role in the savings and retirement markets, whilst still benefiting from the Pru name.

This is significant at a time of rapid change in the market, with competition increasing from the likes of newly-merged Standard Life Aberdeen. The Pru is keen to tap into growing customer demand for managed solutions through its PruFund propositions and range of actively managed funds.

Meanwhile, Prudential plc will be able to focus on the attractive returns and growth potential of its market-leading savings and protection businesses in Asia and the US. Importantly, the non-European entity shouldn't be subject to Solvency II requirements.

The opportunities in the Pru's markets have been well documented, with the working age population in Asia growing by one million a month.

Source: interactive investor              Past performance is not a guide to future performance

In the US, 10,000 people will be retiring every day for the next 20 years. This is the wealthiest generation that has ever lived, and they have a growing need for income protection products. Jackson is already one of the largest providers of retirement solutions in the US, delivering income security to increasing numbers of baby boomer retirees.

This outlook has driven Pru shares to record highs in recent weeks, although they've refused to break the £20 barrier despite favourable broker comment. The stock was 5% higher today after the demerger plan was announced alongside annual results showing a 10% rise in operating profits to £4.7 billion.

In a sign of the company's confidence in its outlook, the Pru increased its dividend by 8% to 47p a share, although the projected yield of 2.8% is still noticeably shy of some of its competitors.

In a note published in January, UBS placed a sum-of-the-parts valuation of 2422p on Prudential - equivalent to a market capitalisation of £62 billion - and said it was trading on a projected 2018 PE multiple of 15.4x.

Interestingly in terms of demerger prospects, the UK operation was valued at £8 billion with a PE multiple of 12.6x, while the UBS view on the M&G asset management business was a valuation of £7 billion with a PE at 16 times.

The UK and Europe arm of the Prudential grew profits by 10% to £1.4 billion in 2017, with assets under management up 13% to £351 billion.

These are early days in the demerger process, with the timing dependent on market conditions and the planned sale of the Pru's £12 billion UK annuity portfolio to Rothesay Life.

But Richard Hunter, head of markets at interactive investor, described the potential benefits arising from the demerger as intriguing.

He said: "Should Prudential capitalise on the opportunities, the move could be extremely rewarding."