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Elevator Pitch
Prudential plc (NYSE:PUK) [2378:HK] [PRU:LN] shares are rated as a Hold.
I wrote about Prudential’s dividends and the prospects for its Greater China businesses in my December 7, 2023 initiation article. My current write-up focuses on the preview of PUK’s FY 2023 financial results and the company’s 2024 business outlook.
Prudential’s shares are at a fair valuation based on my Gordon Growth Model valuation analysis. A FY 2023 results miss is less likely, but PUK’s FY 2024 prospects are clouded by a number of potential downside risks. In that respect, a Hold rating for Prudential is justified.
Company’s 2023 Performance Is Likely To Meet Analysts’ Expectations
Prudential will report its full-year fiscal 2023 results on March 20, 2024. According to the sell side’s consensus financial forecasts shared by the company, the market sees Prudential’s operating profit increasing by a decent +6% to $2,880 million in FY 2023.
There are a number of indicators suggesting a high probability that PUK’s FY 2023 financial numbers will be in line with what the sell side anticipates.
Firstly, there doesn’t seem to be major surprises with Prudential’s fourth quarter performance based on takeaways from the company’s meeting with analysts from stock broker UOB KayHian late last year. UOB KayHian published a research report (not publicly available) titled “More Conservative On (2024) Growth Outlook” on December 15, 2023 detailing notes from its meeting with Prudential’s management team. In this mid-December report, UOB KayHian highlighted “no significant change in (the company’s) 4Q23 trend” based on PUK’s management comments. Furthermore, the December 15, 2023 UOB KayHian report shared the management’s view that a slower pace of industry “demand” growth for its core Hong Kong market is likely to have been offset by the company’s “market share” gains in 2H 2023.
Secondly, Prudential’s key peer, AIA Group Limited (OTCPK:AAGIY) (OTCPK:AAIGF) [1299:HK], recently announced its FY 2023 results on March 14, 2024. According to Morgan Stanley’s (MS) post-results research report cited in Hong Kong finance news portal AAStocks’ March 14 article, AIA Group’s “operating EPS (Earnings Per Share)” for the previous year met the “market consensus” projections. An earlier August 2023 Financial Times commentary piece highlighted that “rival AIA, which Pru (Prudential) contemplated buying in 2010, is a tough competitor” for PUK. It will be reasonable to assume that the sell side analysts would have used similar insurance industry assumptions in forecasting Prudential’s and AIA’s FY 2023 results. As such, AIA’s in-line FY 2023 performance has positive read-throughs for PUK.
Thirdly, the consensus fiscal 2023 financial estimates for Prudential have been revised downwards recently. This lowers the risk of PUK’s actual FY 2023 results disappointing the market which has already reset its expectations. Specifically, the sell side’s consensus FY 2023 operating income forecast for Prudential was reduced by -4.% in the past one month based on S&P Capital IQ data.
There Are Downside Risks Relating To PUK’s 2024 Business Outlook
I mentioned in the previous section that I don’t think Prudential’s FY 2023 results release on March 20 will be a negative surprise for the market. On the flip side, my opinion is that there are risks which could lead to PUK delivering a weaker than expected set of results for fiscal 2024.
One risk factor is Mainland Chinese Visitors or MCV demand which has a big impact on the performance of PUK’s Hong Kong business operations.
Insurance industry publication Asia Insurance Review’s recent March 14, 2024 article cited ratings agency S&P Global Ratings’ prediction that “the pace of premium growth (for the Hong Kong insurance market) will moderate (in the next 12 months) following the pent-up demand from mainland Chinese visitors” that has been realized to a large degree in 2023. In the December 2023 UOB KayHian report which I referred to in the prior section, PUK’s management acknowledged in the meeting with the brokerage’s analysts that “insurance sales to mainland China visitors (MCV)” were “continuing to normalize after peaking in April” 2023.
Another risk factor is the interest rate related headwind for PUK’s Mainland Chinese unit, CITIC Prudential Life.
The future profitability of CITIC Prudential Life might be negatively impacted by the low rate environment in Mainland China. As per a March 6, 2024 Reuters write-up published on Nasdaq’s website, the “10-year (China government bond) yield” recently dropped to a “22-year low on expectations that (Chinese) authorities will keep monetary conditions easy.” This implies that CITIC Prudential Life’s FY 2024 margins could be weak with China’s rates on a declining trend.
Also, Prudential’s geographical expansion plans might potentially translate into higher than expected expenses that weigh on the company’s 2024 profitability and bottom line.
In an Financial Times article published on August 30 last year, it was highlighted that Prudential’s new CEO, Anil Wadhwani, who came aboard in February 2023, has the intention of pushing the company to build a larger presence in markets outside Greater China such as “India and Africa.” On one hand, it is good that PUK is working on geographical diversification. On the other hand, such efforts tend to involve trading off “short-term pain” in the form of higher expenses for “long-term gains” relating to a more resilient and diversified geographical mix.
Concluding Thoughts
I have a Neutral view of Prudential. There is a low risk of a big correction in PUK’s share price associated with below-expectations FY 2023 results. But there is meaningful uncertainty pertaining to Prudential’s 2024 prospects considering multiple downside risk factors.
Prudential is currently trading at 1.63 times trailing P/B (source: S&P Capital IQ), which I deem to be fair. My target P/B multiple for PUK is 1.67 times which is close to its current multiple. I have used the Gordon Growth formula to value Prudential, which calculates a fair P/B metric by dividing [ROE minus Perpetuity Growth Rate] by [Cost of Equity minus Perpetuity Growth Rate]. My ROE, Perpetuity Growth Rate, and Cost of Equity rate assumptions are 13% (consensus FY 2023 ROE estimate as per S&P Capital IQ data), 3%, and 9% (considering the average cost of equity in the 7%-9% range for insurance companies in the US).
