For much of the past decade, Prudential has felt like a super-sized, FTSE 100 conglomerate with an identity problem. First, there is the insurer’s Asian division, a high-growth business that has been increasing sales of health cover at almost exponential rates. Then, in the United States, there is Jackson National Life, selling retirement and investment products in a market that has done well out of the baby-boomer generation but is massively competitive. In Britain, there is a low-growth life and pensions unit. Finally, there’s M&G, the fund management division that manages the money of Prudential policyholders but also runs funds on behalf of savers and investors outside the insurer in multiple geographies. It is facing its own pressures, not least on fees.
Put simply, there has been no obvious reason for the Pru’s component parts to be housed under the same roof, but they have stayed there, largely out of necessity. No longer. A variety of moving parts has finally made it possible for Mike Wells, the Pru’s chief executive, to split the group into two separately listed businesses under a plan that he hopes will create substantial additional value for shareholders. It also might help to stimulate the share price, which has lost about 13 per cent this year as financial stocks have fallen out of favour.
Prudential was established 170 years ago. It sells life and health insurance, savings and investments via operations in Britain and continental Europe, America, Asia and Africa. It has more than 26 million customers, employs about 24,300 staff and in its most recent financial year made operating profits of just under £4.7 billion.
Part of the separation has already happened. M&G is now known as M&G Prudential and consists of the fund management, life and pension operations in the UK and continental Europe. A £12 billion book of annuity assets is being passed to Rothesay Life, which will free up more than £1 billion of capital, which will help the business and no longer act as a drag on the group. This part will be listed separately, with an estimated valuation of about £10 billion.
Shares in this new company, which should offer higher income but lower growth, will be given to the holders of existing Prudential plc shares, consisting of the fast-growing Asian, US and African divisions, plus Eastspring, its Asian asset manager, and looks likely to be valued at about £35 billion. The Pru hasn’t said exactly when the split will take place, but it is likely to be either next year or in 2020.
Figures covering the first nine months of the year published by the insurer give a flavour of how the split businesses will look. At M&G Prudential, profits from new business were up by a healthy 18 per cent to £277 million, driven by strong customer interest in its Prufunds products, which specialise in funds that invest in multiple asset classes. The departure of £5.6 billion of funds money demonstrates the competitive pressures in the sector and total funds under management were £16.3 billion lighter at £334.4 billion. Sales of insurance premiums were flat. In short, solid but tough.
Asia did what Asia does, increasing new business profits by 15 per cent to £1.76 billion, with further increases seeming inevitable. It sits less happily with the US, where it is hard to eke out growth, although higher interest rates and tax cuts helped Jackson’s new business profits to increase by a strong 22 per cent. Both offer good growth potential.
Splitting the group will give both sides room to breathe, with simpler regulatory, capital and management structures — and both companies look as if they will be worth owning.
ADVICE Hold
WHY It may not be immediate, but the benefits of each division’s new-found freedoms should unlock value
Avon Rubber
Avon Rubber has a spring in its step. It may be the rather unlikely combination of two divisions, one with its roots in gas masks and the other in kit for milking cows, but it is making both of them pay.
The company, set up in Wiltshire on the banks of the River Avon in 1885, initially specialised in tyres and tennis balls before discovering its vocation in the Second World War, during which it produced 20 million gas masks. It also has a tradition in providing rubber tubing and liners to the British dairy industry.
In its modern guise Avon Rubber makes masks, or respiratory protection systems, for the military, fire brigades, police and frontline special forces in about 90 countries. It also makes breathing gear for deep-sea divers and its dairy division makes tags that provide health checks for cattle.
Its results for the 12 months to the end of September were perfectly respectable. Protection, by far the biggest part of the group, generated orders of £124.6 million, a 7.4 per cent improvement on the previous year that benefited from a contract from the US Department of Defense for its M50 mask and a five-year respirator deal with the Ministry of Defence. Operating profits were up 20.4 per cent at £19.5 million.
The dairy business, Milkrite Interpuls, suffered a 2.6 per cent slowdown in orders to £48.7 million as weakness in the American market offset strength in Europe and the growing regions of Latin America and Asia. Operating profits were down by 4.8 per cent to £6 million, with currency movements going against it.
Avon Rubber has good growth potential, thanks in part to the increasing use of chemicals in terror attacks, which has made frontline agencies more willing to invest in greater protection. Its expansion, both into underwater breathing systems and extra dairy products, should boost future orders. The dairy business is cyclical, but consolidation among farms in the United States and Europe puts the company in a stronger position. This is a quality business, but, unfortunately, that is no secret and the shares trade at 20.8 times earnings for a yield of 1.2 per cent. Not compelling.
ADVICE Avoid
WHY Well-managed, positioned for growth, reasonably valued
