Tuesday, 10 March 2015

Prudential: may have lost their CEO but not their mojo

I concluded my last write up of the global insurer Prudential back in November (link here) that

'...I would still buy only on weakness.  1350p and each 50p down seems reasonable to me.  Still a good theme, just look to embrace any weakness...and I am still holding onto my AIA'

So one good call and one less good one.  AIA - a Hong Kong listed competitor of Prudential in Asia - has performed very well and I still see good catch-up / absolute return potential there...


...unfortunately the Prudential stock did not quite get back to that c. 1350p level, bottoming at c. 1400p and rocketing up since:


That is the way it goes sometimes. So what price now following Prudential's FY results update today?

Well first let's deal with the CEO evolution following the resignation of Tidjane Thiam to join Credit Suisse.  You have to say that looking at the performance of the Prudential under Thiam it has done rather better than his soon-to-be new company.  Maybe that is half the challenge - and many highly motivated people after doing a great job somewhere love a challenge. 


Thiam will be leaving Prudential in pretty rude health as far as I can see.  I particularly liked this surplus generation chart below.  That is great progress.  


Plus on broader metrics too like dividend per share even if the yield is currently only a little over 2%. 


So how to think about valuation?  I found this chart useful as it implies a £2.5bn+ annual free surplus generation going forward (the cumulative underlying free surplus of £10bn+ over four years).  £2.5bn as a 5% yield equals a £50bn implied market cap...nicely above the current £42bn+ level.  


So there is some inherent longer-term value and maybe (at least in this metric below) some competitiveness against peers (which I assume includes AIA).  Of course I am sure this was a specially chosen example...

So putting it all together - and given I hold AIA already - below 1500p I will buy some Prudential stock (and each 50p below).  They may have lost their CEO but they have not lost their mojo for medium-term investors looking to access structural themes like the ones below: 

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