Shares in Prudential PLC (LSE:PRU) are valued lower than others in the wider sector as investors continue to take a cautious view, despite the insurer’s exposure to fast-growing markets in Asia and Africa, according to analysts at UBS.
That caution means the stock is trading at one of the highest market-implied costs of equity in the sector of between 12% and 13.5%, a measure that reflects the return investors demand for holding the shares.
UBS believes there is room for the shares to rise, setting a 12-month price target of 1,385p, about 18% above the recent price of 1,167p.
The bank used several valuation methods, including models based on Prudential’s embedded value and future cash flows, to assess what investors are pricing in.
On one measure, the cost of equity is around 12-12.5%; on another, it’s closer to 13.5%, based on expected earnings growth of 8-10% and a return on equity of up to 14%.
UBS’s price target is based on a long-term view of the company’s earnings, applying a 15% cost of equity to reflect the risk and potential reward of investing in the business.