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Prudential stuck in continental drift

The Times

Patience is a virtue that investors in Prudential have long needed to possess owing to its slower-growth UK and US businesses. Judging the insurer’s ability to accelerate growth as a purely Asia and Africa-focused operation has now been drawn out further.

Measures to control a resurgence of Covid in Hong Kong have hamstrung sales in what has traditionally been its largest market. Annual premium equivalent sales, a measure of new business activity, were down by more than a quarter in Hong Kong last year. Gaining more credit from the market for making the logical move to simplify its business is going to take more time.

The FTSE 100 constituent completed the demerger last year of its US retirement business, Jackson. Unlike other UK-listed insurers, Prudential is no longer being judged as an income stock, but on growth. The dividend was cut in 2020 before the Jackson demerger, a 17.23 cents-a-share dividend for last year is equivalent to a yield of only 1.2 per cent at the current share price.

Instead, it is seeking to plough cash into the faster-growth health, wealth and protection markets in Asia and Africa. It is tooled up for investment, too, raising $2.4 billion on the Hong Kong stock exchange in order to cut debt. That leaves it more room to throw cash behind new business, growing its bancassurance reach and bolt-on acquisitions.

Structural drivers such as a rising middle class and rapid population growth, boosting demand for protection and wealth management products mean that cash should be well spent. There were glimmers of promise in full-year trading figures. New business profits were ahead of market expectations thanks to better margins on new business, while a better performance in mainland China, Indonesia and Singapore helped pick up the slack from the fall in Hong Kong sales. In mainland China, gross premium growth of 15 per cent was far ahead of the 1 per cent decline in the broader market.

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But the benefits of its newly shorn structure have been mired by the closure of Hong Kong’s borders amid a “fifth wave” of Covid-19 and continued restrictions within many of its Asian markets. Outgoing chief executive Mike Wells, who is due to step down later this month, gave no indication of any assumptions on when the border might reopen and when trading could return to pre-pandemic levels.

So it’s unsurprising that investors have been unwilling to award a higher rating to the Pru versus its Asian rival AIA Group.

There are no plans to ditch the London head office, despite the pivot to Asia, nor to cut the UK listing. The latter is good news for investors given 40 per cent of shareholders are UK-based. Any move to delist from London and become single-listed in Hong Kong risks causing heavy selling from institutional investors restricted from holding the shares.

Longer-term, an operating structure that straddles the UK and China puts it in the same basket as banking giant HSBC, at the mercy of geopolitical relations between Beijing and the West. Getting a new chief executive and chief financial officer in place in Asia, as previously announced, would help to shore up investor confidence.

Could one-time predator Prudential become prey? A more geographically focused business would make it easier to digest for a large Asian rival, but that’s not a possibility that has yet been reflected in the share price. Without clearer sight on when pandemic-related restrictions will be lifted and proof of more consistent growth in new business sales, Pru may struggle to win more confidence from investors.

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ADVICE Hold
WHY
Coronavirus restrictions and the risk of weaker Chinese economic growth could see the shares treading water for a while longer

BlackRock World Mining Trust
The continuing conflict in Ukraine has pushed out any prospect of inflation easing, as supply chain disruption and sanctions against Russia, a heavy resource producer, have stoked a resurgence in commodity prices.

While global equity indices have fallen sharply, mining shares have kicked into another gear as an expected cooling in metals and minerals prices is kicked farther down the road. For BlackRock World Mining Trust, which invests primarily in a range of globally-listed mining companies, that has resulted in a total return of almost 36 per cent against a negative performance from the FTSE 100. That also means the shares’ discount versus the trust’s net asset value has switched to a 19 per cent premium against the NAV at the end of January.

The flight to resource stocks is unsurprising because commodities are considered a natural hedge against inflation. Rising prices raises the prospect that the record dividends paid out by miners in respect of last year’s sharp post-pandemic recovery, will not fall by as much as previously expected. Those heady payouts from the likes of Rio Tinto, BHP and Glencore, which are among the trust’s top ten holdings, meant that last year the BlackRock trust paid out a dividend of 42.5p, more than double the previous year’s.

The fortunes of the miners it holds are naturally in sync with the wax and wane of metal prices, which adds an inherent layer of volatility in their valuations. Cooling commodity prices during the second half of last year meant that the trust’s NAV return sank to only 2.8 per cent, way below the 17.4 per cent return recorded six months earlier.

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Slowing Chinese economic growth also presents the risk of weaker demand, for steel-making ingredient iron ore in particular. Environmental, social and governance considerations might take the trust out of the running for some investors. It has some exposure to thermal coal via Glencore, which accounted for 7.7 per cent of total assets at the end of last year.

It would be difficult to bet against the trust’s shares running out of steam, but growth in the NAV has been reflected in a sizeable premium.

ADVICE Hold
WHY The share price premium versus NAV seems to account for future potential growth

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