First and foremost, life assurer Prudential (LSE: PRU) (NYSE: PUK.US) is a play on Asia.
That region contributed half of Prudential’s new business profits in the first three quarters of last year, with the US and UK contributing 40% and 10% respectively. In 2011 Asia made up 30% of profits; in 2012 it was 40%. Can that growth continue?
Tellingly, the company devoted some 200 words to describing the opportunities in Asia in its third-quarter outlook statement. The UK and US combined merited just 40 words. These mature markets are being managed ‘for earnings and cash’.
Sweet spot
The thesis for Asia is strong. An increasingly urbanised, young, middle-class population has more discretionary income. It is spending more on financial protection, and it is saving more. That’s especially significant where the provision of state welfare is low: 60% of medical bills are paid directly from consumers’ pockets in Singapore, compared to just 9% in the UK.
The Asian life assurance industry is relatively immature, and Prudential has a strong presence and multiple distribution channels in more than half a dozen South-East Asian countries such as Singapore, which it describes as in a ‘sweet spot’ for growth. Sales in the region are mainly distributed through third-party agents and banks, and margins in the uncompetitive industry are fat.
It remains to be seen whether the pull-back in emerging markets hits growth rates: the company will hope that it doesn’t impact domestic spending. Longer-term competition from regional players — especially Chinese — may be a more significant drag.
Cash
Mature operations in the UK and the US that generate cash have been the driving force behind expansion in Asia. Now, the company has targeted a doubling of cash flow from Asia, from £0.5bn in 2012 to £1bn-a-year by 2017. It has an overall target of generating £10bn of cash – a third of Prudential’s market value – across the group by the end of 2017.
That’s likely to drive increased dividends. Currently the yield is 2.5%, but if the company throws off cash is it plans then the payout could well rise. The valuation, on 17.5 times 2013’s projected earnings and 14.5 times 2014’s, anticipates growth.
Prudential’s Achilles’ heel is its vulnerability to investment returns. Bullish stock markets have been favourable, and a return to more normal yields on bonds would be positive, but a scenario of poor equity markets and low interest rates would be painful.