There was a time when Prudential PLC (LSE:PRU) was the darling of London’s insurers, its fortunes powered by the rising middle classes of Asia. Those days may feel distant, but UBS reckons investors are still undervaluing the business.
The broker keeps its “buy” rating and has nudged up its 12-month price target to 1,295p, suggesting about 20% upside from the current 1,075p.
Analysts led by Nasib Ahmed argue that Prudential still trades at a discount to rivals such as Hong Kong-listed AIA, even after adjusting for the group’s investment arm, Eastspring.
UBS has updated its valuation method to what it calls a traditional embedded value, or TEV, approach. This is a way of valuing life insurers by estimating the present value of their future profits.
After applying an 8% discount rate and adjusting for investors’ higher cost of equity, UBS cuts the reported TEV by around 40%. It then adds the value of expected new business, which makes up about 35% of the total.
That gives a valuation of about $40 billion for Prudential’s insurance operations. Adding $3.1 billion for Eastspring and subtracting holding company costs produces a fair value of 1,295p a share.
Regionally, UBS values Prudential’s Hong Kong business at 1.2 times its TEV, China at 1.5, and other Asian markets mostly around 1.1 to 1.3. The group as a whole trades at 1.2 times, compared with AIA’s 1.5 and FWD’s 1.0.
UBS concludes that Prudential’s discount remains wider than history once Eastspring is fully factored in; an opportunity, it thinks, for patient investors.