Prudential Reports Low Earnings for 2022; Shares Undervalued

Prudential PRU clearly missed market expectations in its results on March 15. For example, consensus’ estimate for EPS, as collected by FactSet, was $0.65 and Prudential delivered $0.37. It’s quite obvious that the March 15 results are messy with shares trading down over 10% at the time of writing. However, we still believe there are an unfortunate confluence of factors that are hitting Prudential. First, under IFRS reporting standards investors only really have three years of data to work with. Second, those three years give no indication about the true earnings power of the business. For example, in 2019 Prudential earned $2.12 billion and then after it divested Jackson that swung to negative $2.04 billion the next year. The results for 2022 have clearly taken investors by surprise as earnings have shrunk to $1.01 billion. Yet, digging deeper there are also a number of positives.

First, traffic from China to Hong Kong is returning with visitors from the mainland reaching 280,525 during January 2023. While it’s still early days, that is good. Second, new business contributions are, by and large, better than we expected, though a little lower in the unit-linked business. Further, there is improvement in surrenders and maturities across all three lines of business. Revenue margins are much better than we expected. Acquisition costs are in line with what we predicted and administration costs are a little better than we believed they would be. The dividend of $0.13 per share makes the distribution $0.19 for earnings in 2022.

Having rolled our model to account for a number of factors including changes in the exchange rate, refining our estimates, and the change in the Jackson share price, we lower our fair value estimate to GBP 14.60 per share and maintain our no moat rating.