Analysts forecast that the annual earnings of the FTSE 100’s Prudential (LSE: PRU) will increase 11% each year to end-2027. It is growth here that ultimately drives any firm’s share price and dividends higher over time.
To work out more precisely what this means for its valuation, I ran a discounted cash flow (DCF) analysis. This identifies where any company’s share price should be trading, based on cash flow forecasts for the underlying business.
The DCF for Prudential shows its shares are currently 51% undervalued at their present price of £9.15. Therefore, their fair value is £18.67.
Secondary confirmations of its extreme underpricing are seen in key relative valuation measures. More specifically, on the price-to-earnings ratio, Prudential trades at 13.8 against its peers’ average of 18. These comprise MetLife at 12, Allianz at 13.9, Manulife Financial at 15.4, and Aviva at 30.6.
And it is also undervalued at a price-to-book ratio of 1.8 compared to its competitors’ average of 2.
How is the macroeconomic backdrop?
Annual earnings growth of 11% is very robust, although there are risks attached.
In 2019, Prudential – the UK’s biggest insurer at that point – split its business into two FTSE 100 firms. M&G would focus on the UK and Europe, while Prudential would concentrate on its US, Asian and African operations. Since the 2021 demerger of its US business, Prudential has focused on Asia and Africa.
Consequently, a principal risk since then has been slippage in the long-running strong economic growth in those regions. Diminishing growth could squeeze its margins.
That said, the World Bank projects overall Asian economic growth this year of 4.5%, compared to 4.4% last year. The Bank projects 3.5% growth this year for Africa, up from 3.3%.
By comparison, it projects US growth of 1.8% this year, down from 2.8%, and European growth of less than 1%, against 0.9% last year.
Has the business been performing well?
The firm’s 20 March 2024 results saw annual premium equivalent (APE) sales up 7% year on year to $6.202bn (£4.62bn). New business profit (NBP) jumped 11% to $3.078bn, and adjusted operating profit climbed 10% to $3.129bn. Earnings per share (EPS) rose 8% to 89.7 cents.
Within these numbers, its key bancassurance NBP increased by 31%. This is business generated from authorised banks selling Prudential’s life assurance and other insurance products. Fourteen of its major markets achieved double-digit growth here, led by Hong Kong, Singapore, and Taiwan.
Its other key operation – health insurance — saw NBP rise 11%, led by Hong Kong, Singapore, and Indonesia. This was based on new healthcare products, repricing initiatives, and further training of its agency sales force, according to the firm.
Its Q1 performance update released on 30 April showed APE sales rise 4% to $1.677bn. New business profit jumped 12% to $608m, and the new business margin improved 2%.
For 2025, Prudential expects to grow its NBP and EPS by more than 10%.
My investment view
I hold several shares in the same sector, so buying more would unbalance the risk-reward profile of my portfolio. However, I think Prudential is well worth the consideration of other investors without such holdings.
