Prudential: H1 2006 results

7:32 a.m. Fri 28 Jul 2006

Prudential, the UK’s second largest insurer reported that operating profits for the half year to June rose by 17% to £980m, driven mainly by overseas sales and cost savings in the UK business.

New business volumes, which grew 27% in the first quarter, seem to have slacked off with the half year new business volumes growing 9% on an APE basis to £1,255m. The fund management business performed well with net inflows up 138% to £5.3bn.

Following the pattern seen previously, the company recorded strong sales overseas and weak sales at home. UK insurance sales were down 9% on an APE basis. Insurance sales in Asia grew by 35% on an APE basis in H1. Sales in India were up 61%, Korea up 56%, China up 40%, Singapore up 32% and Taiwan up 19%. US sales were up around 50%.

Given the weaker market in the UK, the company is sensibly focusing on cost reduction. Prudential said it has raised its targeted cost savings from UK business to £150m a year (by 2009), up from the previous target of £110m per year.

On the whole the company is doing well but we believe that it (along with the other giant Aviva) is likely to lag the sector. Our opinion of the management of the company has been shaken by its handling of the company’s on-line bank Egg.

We have viewed Egg with scepticism for some time and it has delivered yet another poor performance, reporting a loss in H1. The company says it is confident of turning this around by H2 but this is a tale that we have heard before. Not that losses at Egg are enough to cause a significant impact on Prudential’s profits; our prime concern is that it reflects poorly on management. Prospects for Egg have always been a bit murky and the company’s inability to cut its losses and move on is not something we view with favour.

The share trades at 595.5p, on a prospective PE (2007 earnings) of 9.5x with a yield of 2.9%.