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Merger of UK businesses may indicate a future divestment and potential catalyst for the shares
Thursday 17 Aug 2017 Author: David Stevenson

FTSE 100 global life insurer Prudential (PRU) has been rallying this year, its share price up around 10% to £17.78 since the end of 2016. Its recent results beat consensus forecasts by 5% and 7% on new business revenue and profit respectively.

But the company merging its UK businesses is perhaps the most significant piece of recent news
from Prudential.

Combining the company’s asset manager M&G and Prudential UK and Europe into a new entity called M&G Prudential is being done to create a more ‘capital-light’ operation according to the board.


Refining the focus

However, for a business worth nearly £50bn it might make sense to cut off some divisions that aren’t as profitable as others. If the newly packaged up UK businesses were sold off, Prudential would be purely US and Asia focused.

The potential sale of the UK arm is likely to be one of the hot topics when Prudential holds its investor day on 16 November.

The structural growth story of Asia is well known and the baby boomer group in the US is ripe for Prudential’s US life business, Jackson. The division enjoyed a 7% rise in operating profit in the first six months of 2017 and according to the firm is outperforming the wider market.

In Asia, new business profit is up by 18% and with the firm is expecting a further 700m people to enter the middle class in the next five years, the region has huge potential.

Prudential says that ‘by 2020, the spending of the middle class in the Asia-Pacific region is expected to surpass that of the US and Europe combined’.

Sale may not happen for some time

This is not say that the Prudential’s UK operations are a drag on the company yet, its life premium revenues are up 22% to £721m in the first half. In terms of profit growth though, the UK is lagging behind the company’s other regions, especially for long term business. While Asia and the US increased by 20% and 22% respectively, the UK only increased operating profit by 1% to £480m.

M&G Prudential is expected to produce to savings of £145m a year from 2022 after a one-off outlay from shareholders of £250m. This suggests that a sale of the business is not happening any time soon. Which is not a disaster as the firm has strong fundamentals.

Based on forecasts Arjan van Veen, analyst at UBS, predicts that Prudential is trading on a forecast price to book ratio of 3-times and using his earnings per share figure, price to earnings ratio of 12. This is already at a slight premium to its peers but if the UK business is sold it could change the market’s view of the stock and drive further share price strength.

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