Quality Business, Deeply Discounted13 Nov 2024 21:32
I think PRU are one of the best buys out there at the moment, and their share price has been and continues to be disproportionately punished due to extremely bearish sentiment towards China exposure, and towards UK equities more broadly.
On the relative attractiveness (or otherwise) of the UK market, firstly. The UK was already an extremely unattractive place to invest from a global perspective for the best part of the decade. The broad based declines of GBP vs most major currencies over the last 20 years is evidence of that. The political uncertainty from 2016 onwards, which included a merry go round of unqualified Chancellors, as well as the Truss mini budget debacle, made it almost impossible for foreign investors to put their money into the UK, such was the instability and unpredictability. Looking at the data for FDI into the UK we can see that the figure was + c$380BN in 2016, to - $43BN last year. The landslide Labour victory caused a meaningful rally in GBP but that came to an abrupt halt due to the recent budget and Sterling has sold off again as GILT yields rise to levels not seen since Trussonomics... The UK Equity market hasn't been immune either. It is important to remember that UK Equities make up a single digit percentage of most international investor's portfolios, and we tend to have a 'home bias' to a large extent, favouring domestically listed companies due to familiarity more than merit.
Prudential (amongst others) could be considered for any portfolio on merit. The valuation is compelling at c8x earnings, and it is much more streamlined business since the shake up, with a stronger balance sheet,double digit operating and positive free cash flow from operations. The share buyback is also significant although it still hasn't provided a floor, yet.
On the China front, I also believe that fears are overdone. Prudential has exposure to many high growth regions, including India and Indonesia. It is not as sensitive to revenue fluctuations from China alone, as the share price would suggest. Even so, recent results included highly encouraging growth in new business in China, and after almost 4 years of weakness in China, I think we're much nearer the end of that cycle than the beginning, especially with the full support of Beijing's fiscal might.
My final point is around risk/reward. After the material declines in the share price, you are now getting great value at these levels with a large margin of safety. One can reasonably expect that, given the strength of their recent results, the growth in revenues and profits in line with expectations, and healthy FCF, that they will deliver at least in line with FY guidance which makes the risk of downside (surely!) limited from here. I am not calling a bottom, but based on everything I know about the company and continue to learn each day, I am happy accumulating at these levels with conviction as it is a high quality, low risk business with more upside potential than downside
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