Monday, February 29, 2016

43rd AIM Equity Update by Travis Mantel. Prudential Plc (PUK). "Not a Piece of the Rock, But Acting Like It"


Prudential Plc (NYSE: PUK, $33.81):
“Insurance Giant Hitting Small Markets”
By: Travis Mantel, AIM student at Marquette University

Image result for prudential plc

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

Prudential Plc. (NYSE:PUK) operates as a holding company with units that provide insurance and financial services.  Their products include life insurance, pensions and annuities, and a collection of investment schemes.  Their international exposure includes the UK (39.3%), the United States (35.7%), China (10.6%), Japan (4.7%), and many other smaller markets.

• Prudential has seen a lot of growth over the past five years due to both organic and inorganic means.  Most notably, PUK has grown profits by 12% YoY for the past five years.

• Prudential is well positioned to take advantage of the growing middle classes and high economic growth potential in emerging markets.

• The EU has passed regulation (Solvency II) that was implemented in 2016 that called for higher reserves for insurance companies, and Prudential had no compliance issues with Solvency II.    
• Prudential has seen a decrease in stock price in recent weeks due mostly to the volatility in the financial markets and investor skepticism in Asia.

Key points: Prudential Plc has experienced tremendous growth over the past five years.  They have grown profits by 12% YoY during that period and have down so through both organic and inorganic means.  Even with this growth, PUK has recently been under pressure due to their exposure to Asian markets.  With 10.6% of their revenues coming from China, they have been hurt by China’s plan to cap the use of UnionPay bankcards for the purchase of overseas insurance products at $5,000 each time.  That being said, they continue to show potential for growth in emerging markets.

Prudential has been able to get exposure to emerging markets through acquisitions.  Most recently they have entered the Zambia life insurance company by acquiring Professional Life Assurance (Zambia’s fourth largest life insurance company).  Prudential is targeting emerging markets because these markets are expected to grow at a more rapid rate than developed markets.  Also, emerging markets have continued to grow their middle classes, which is the target customer for PUK.  

In 2009 the EU had been pushing for a new regulatory framework for insurance companies.  The Solvency II regulation was finally passed and implemented in January 2016.  This regulation called for higher surpluses and better risk management for insurance companies.  Prudential Plc is compliant with this and have enough liquidity to deal with debt obligations through 2019.  The new regulation has not affected Prudential like it has many other smaller insurance firms in the EU.  Management mentioned that they would not be surprised if more regulation was passed for insurance companies, but nothing is on the table at this point.

What has the stock done lately?
Prudential Plc has been beaten down in recent weeks due to their Asian exposure.  The stock dropped about 10% on February 2, 2016, due to slowing growth and investor distrust in China.  They currently are trading at two year lows due to the volatility in the markets and troubles in China.  Since the beginning of 2016 Prudential has dropped 25%; however, once the markets stabilize, they are well positioned to grow.

Past Year Performance:
Prudential has decreased 31.7% in value over the past year, but with their current market position, PUK is a bargain.  PUK has seen a 52-week high at $52.60 and a low of $32.20.  They continue to pay a dividend that yields 3.5%.  



  Source: FactSet 


My Takeaway
Prudential has been beaten down in 2016, but will experience a rebound once the markets stabilize.  They are a very acquisition-heavy firm, but that has set them up well to profit on under-penetrated markets.  PUK is definitely a great buy right now because of how cheap it is selling and will be selling closer to the 52-week high once they have the opportunity to capitalize on their many recent transactions. 

Past Month Performance

Source: FactSet

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