In 2021, global insurance giant Prudential plc made a bet-the-farm decision to ditch its US and European operations to focus on the emerging middle classes of the Asian continent.
Today’s interim results, though they had their bright spots, suggest that Prudential’s big bet “isn’t playing out as the company would have hoped”, per AJ Bell’s investment director Russ Mould’s analysis.
New business profit fell by 1% year on year dip $1.47 billion, which in fairness was against strong 2023 comparatives, while firm-wide profit plummeted from $947 million in the first half of 2023 to $182 million due to diminishing investment returns.
Chief executive Anil Wadhwani can’t shoulder all of the blame here.
China’s middle class was hammered by some of the most severe Covid-era lockdowns in the world and the road to economic recovery remains fraught.
But it is also true that Prudential is underperforming against other Asia-focused life insurers, specifically AIA, which as Mould pointed out, “put up a big increase in profit for the first six months of the year”.
Despite the elusive growth in new business, Wadhwani has stuck to his guns and reiterated mid-term guidance of 15-20% worth of new business profit growth by 2027 from the 2022 baseline.
But Wadhwani needs to provide some clear signs that achieving this is viable.
Mould stated: “Wadhwani has only been in post for a little over 18 months so he is likely to be given time to turn things around, but he will need to demonstrate that the targets outlined for 2027 are credible before long.”
For now, Prudential faces an uphill battle to recover its market valuation, which has fallen by nearly a quarter this year alone and a third in the past 12 months.
Analysts at KBW gave a warning to investors looking to take advantage of this discount, stating that “much of this print confirms KBW's investment thesis about these shares being a value trap until growth recovers”.
“We expect there to be lingering uncertainty about how this is achieved… Even with the implicitly positive (net book value) outlook, we are not sure this print will reverse the narrative and so fear a small negative response today,” KBW added.
There were early signs of optimism when Prudential’s shares bounced 2% higher following the interim earnings price, even though the stock has since retraced to 0.6% higher from Friday’s close.
“The mildly positive reaction to Prudential’s numbers suggests the market is willing to give it the benefit of the doubt, helped by the fact full-year guidance is being maintained and by a material increase in the dividend,” stated Mould.