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Analysts forecast that the annual earnings of the FTSE 100’s Prudential (LSE: PRU) will improve 11% every year to end-2027. It’s development right here that finally drives any agency’s share value and dividends increased over time.
To work out extra exactly what this implies for its valuation, I ran a reduced money movement (DCF) evaluation. This identifies the place any firm’s share value needs to be buying and selling, based mostly on money movement forecasts for the underlying enterprise.
The DCF for Prudential exhibits its shares are at the moment 51% undervalued at their current value of £9.15. Subsequently, their truthful worth is £18.67.
Secondary confirmations of its excessive underpricing are seen in key relative valuation measures. Extra particularly, on the price-to-earnings ratio, Prudential trades at 13.8 in opposition to its friends’ common of 18. These comprise MetLife at 12, Allianz at 13.9, Manulife Monetary at 15.4, and Aviva at 30.6.
And it is usually undervalued at a price-to-book ratio of 1.8 in comparison with its rivals’ common of two.
How is the macroeconomic backdrop?
Annual earnings development of 11% may be very strong, though there are dangers connected.
In 2019, Prudential – the UK’s largest insurer at that time – break up its enterprise into two FTSE 100 companies. M&G would concentrate on the UK and Europe, whereas Prudential would consider its US, Asian and African operations. Because the 2021 demerger of its US enterprise, Prudential has centered on Asia and Africa.
Consequently, a principal danger since then has been slippage within the long-running sturdy financial development in these areas. Diminishing development may squeeze its margins.
That stated, the World Financial institution tasks general Asian financial development this yr of 4.5%, in comparison with 4.4% final yr. The Financial institution tasks 3.5% development this yr for Africa, up from 3.3%.
By comparability, it tasks US development of 1.8% this yr, down from 2.8%, and European development of lower than 1%, in opposition to 0.9% final yr.
Has the enterprise been performing properly?
The agency’s 20 March 2024 outcomes noticed annual premium equal (APE) gross sales up 7% yr on yr to $6.202bn (£4.62bn). New enterprise revenue (NBP) jumped 11% to $3.078bn, and adjusted working revenue climbed 10% to $3.129bn. Earnings per share (EPS) rose 8% to 89.7 cents.
Inside these numbers, its key bancassurance NBP elevated by 31%. That is enterprise generated from authorised banks promoting Prudential’s life assurance and different insurance coverage merchandise. Fourteen of its main markets achieved double-digit development right here, led by Hong Kong, Singapore, and Taiwan.
Its different key operation – medical health insurance — noticed NBP rise 11%, led by Hong Kong, Singapore, and Indonesia. This was based mostly on new healthcare merchandise, repricing initiatives, and additional coaching of its company gross sales power, in accordance with the agency.
Its Q1 efficiency replace launched on 30 April confirmed APE gross sales rise 4% to $1.677bn. New enterprise revenue jumped 12% to $608m, and the brand new enterprise margin improved 2%.
For 2025, Prudential expects to develop its NBP and EPS by greater than 10%.
My funding view
I maintain a number of shares in the identical sector, so shopping for extra would unbalance the risk-reward profile of my portfolio. Nevertheless, I believe Prudential is properly well worth the consideration of different buyers with out such holdings.
