Why Prudential plc’s Investment Plans Should Drive Earnings Skywards

Today I am looking at why I believe Prudential‘s (LSE: PRU) (NYSE: PUK.US) expenditure plans should deliver robust growth well into the future.

Global expansion set to deliver stunning rewards


Prudential has made no secret that it sees the emerging markets of Asia — where personal income levels continue to surge and insurance penetration remains low — as key to the company’s growth story. Just over half of new business profit is generated from these lucrative regions, and the firm is aiming to ratchet up its exposure to these regions through organic and non-organic means.

The company commented recently that

we are selectively investing in new countries where we see opportunities similar to those we see in our most successful markets in Asia: positive demography, strong economic growth and unmet needs for protection due to the absence of a social safety net.

As part of this expansion plan, Prudential has entered Ghana, Cambodia, Myanmar and Poland during the past two years, and is also looking to expand into Saudi Arabia in the near future.

But Prudential has also shown its enthusiasm to splash the cash in other potentially-lucrative territories. The firm bought US life insurance specialist REALIC for $600m back in 2012 as part of its plan to latch onto the “‘baby-boomer’ generation as they transition into retirement.”

The insurance giant is also jumping on the UK infrastructure train alongside many of its sector peers, buoyed by signs of a strong uptick in the domestic economy. In particular, Prudential is at the helm of a project to plough £300m into building hundreds of new British homes in a bid to soothe the country’s housing crisis.

Earnings expected to rattle higher

Such measures are expected to underpin stratospheric earnings growth over the next two years, supported by its proven expertise in rich Asian markets. Indeed, City analysts expect the firm to follow a projected 82% rise this year with a further 10% rise in 2015.

These projections leave the company changing hands on a P/E multiple of 13.7 for 2014 and 12.4 for 2015.

Although this year’s figure is roughly in line with a forward average of 13.3 for the complete life insurance sector, price to earnings to growth (PEG) readings of 0.2 and 1.2 make Prudential a canny value pick in my opinion — any figure around or below 1 is widely considered a snip.

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> Royston does not own shares in Prudential.