Don’t be put off by the shares underperforming its peers
Thursday 04 Apr 2019 Author: Tom Sieber

A disappointing share price showing in the last 12 months has created an excellent opportunity to buy FTSE 100 insurance business Prudential (PRU) ahead of the demerger next year of its UK and European operations from its faster growing Asian arm and US operations.

Shore Capital analyst Paul De’Ath suggests the soon-to-be demerged M&G Prudential business is currently included in the share price for virtually nothing despite the fact shareholders will get shares in the new entity when it lists.

Shares in Prudential have underperformed its peer group by around 16% since the demerger was first announced in March 2018, according to De’Ath.

Don’t let that put you off. Investing in companies which have announced a demerger can have wider benefits.

A demerged business can provide management with more flexibility to take destiny in their own hands and make decisions that best serve the needs of the individual business rather than as part of a larger group.

Demerging can also inspire a more entrepreneurial spirit with executive pay more closely aligned to relevant business objectives and performance. Accordingly, the management team at M&G Prudential has already been shaken up by the unit’s chief executive
John Foley.

Asian growth has been fundamental to Prudential’s investment case for some time. A growing middle class in the region is driving demand for its insurance and savings products and facilitating long-term double-digit growth.

The Brooking Institution estimates that 88% of the next billion entrants into the middle class will be in Asia and by 2030, Asia could represent two thirds of the global middle-class population.

In 2018 the group’s adjusted pre-tax profit hit £4.8bn, against £4.6bn pencilled in by analysts, while the Asian arm delivered a 14% increase in profit to £2.2bn.

The UK and Europe businesses were no laggards with profit up 19% to £1.6bn. The US was the one fly in the ointment, with profit down 11% to £1.9bn.

One of the risks you need to weigh is the difficulty in completing a complex demerger with as yet no certainty on when exactly it will happen.

However, De’Ath thinks investors should resist the temptation to wait on the sidelines until the process is complete, arguing that the post-merger share price for Prudential plc is also likely to be pushed up by those waiting in the wings for a more Asia-focused investment option.

‘If you wait until the demerger has happened, you could end up paying a much higher price,’ he concludes.

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