The Surprising Buy Case For Prudential plc

Today I am looking at an eye-opening reason why shares in Prudential (LSE: PRU) (NYSE: PUK.US) are set to gallop higher.

Expect M&A action to accelerate

With recent financial newsflow underlining the huge potential in the lucrative Asian insurance sector, I expect M&A activity in the area to hot up rapidly. And I believe Prudential will get in on the act sooner rather than later in order to supplement its already-impressive organic growth story there.

Swiss Re was the latest blue-chip player to take the plunge last month when it announced plans to plough up to $425m into FWD Group, which has substantial operations in developing markets globally.

Swiss Re’s group strategy officer John R. Dacey commented that the deal affirms Swiss Re’s commitment to the high growth Asian insurance market, and its strategy to execute meaningful principal investments across the primary insurance value chain.” FWD encompasses ING Group’s former life insurance operations in Hong Kong, Thailand and Macau, as well as its general insurance and pensions division in Hong Kong.

The effect of a rising middle class in emerging markets worldwide, and consequent effect of pushing disposable income levels higher, is prompting insurance leviathans across the world to increasingly scramble around in the takeover bearpit in a bid to reap the rewards of these high-growth regions.

Indeed, promising results last month from Asian life insurance giant AIA Group last month illustrate the fantastic growth potential on offer. The firm — whose life business was subject to a much-publicised failed takeover bid from Prudential itself back in 2010 — reported that the value of new business rocketed 26% during July-September, to $379m.

And Prudential itself announced in August’s half-yearly report that operating profit from its Asian businesses rose 18% during the first six months of 2013, to £512m, a result which helped power group operating profit 22% higher to £1.42bn.

The company has already made heavyweight acquisitions in the region, and completed the $585m purchase of Thailand’s Thanachart Life Assurance Company from Thanachart Bank earlier this year. And I believe that the firm’s strong balance sheet leaves it in a great position to embark on fresh purchasing activity.

Although opportunity-ripe Asia has been identified as the next step in Prudential’s expansion, investors should also be aware of the sterling work the company is making across the globe. The insurer saw operating profits from its core UK operations rise 5% during January-June, to £581m, while in the US profits surged 34% to £616m.

So although Asia is set to become a cornerstone in Prudential’s future growth story, I believe that the company is in great shape to realise earnings-busting potential across all of its major regions.

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> Royston does not own shares in any of the companies mentioned in this article.