The Pru’s more conservative approach to profit recognition is at odds with its lowly valuation and that value should ‘shine through’ when its US business is demerged, says RBC, which has upgraded its recommendation to ‘outperform’ with an £18 share price target.
“For life insurers, like Pru, a method called embedded value (EV) exists that calculates future profits from business already written.
“EV has fallen out of favour in Europe, but it remains a key reporting tool in Asia. We forecast a $2.75bn equity placing will attract new Asian investors who use EV, and we believe it will once again become the lens that investors use for Pru’s valuation.”
In particular, RBC estimates that the Pru trades at half the multiple of peer AIA, which it sees as unwarranted particularly as it uses a more prudent method of calculating its EV compared to AIA, has delivered a higher return on its EV and it has understated its EV by a greater amount.
A recovery in Hong Kong (HK) and higher protection sales post COVID means both companies will have similar growth rates but Pru has greater weight in health products, which RBC expectswill see greater uptake following the pandemic.
The 1,800p sharer price target consists of Asia 1,600p (89% of thevaluation) and US 200p (11%).
Shares today rose 3% to 1,495p.