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Disappointing 1Q'24 dampens Prudential's outlook: Jefferies

Jefferies reduced its price target by 22%.

Prudential’s investors are staying on the safe side after a “disappointing” first quarter (1Q’24) trading update, where activity slowed and no buyback coming in, a Jefferies Equity Research note said.

Ahead of the 1Q'24 update, it seemed that Jefferies was one of the few to question whether a buyback would re-rate the shares. 

However, with Prudential's growth slowing, the shares deeply discounted, and in light of AIA extending their buyback (while growing faster), Jefferies acknowledges that a buyback of at least $1b is now necessary. In its model, Jefferies forecasts $1b with the 1H’24 results.

Despite the recent 52-week low of <£7 a share being relatively close to its downside scenario of 650p, Jefferies believes that it would be difficult to justify a considerably lower share price without presuming that several extreme macroeconomic and geopolitical risks materialise. 

As these are not factored into wider equity valuations, we do not adjust its downside scenario, thus implying that downside risk is limited to <20%.

Conversely, Jefferies does not deny that the disappointing 1Q'24 trading update has impaired the upside scenario. 

Whereas the debate had been on whether management should launch a buyback or focus on growth, investors got neither with the 1Q'24 update. 

ALSO READ: Prudential sees 11% YoY rise in Q1'24 new business profit

Jefferies now set its upside scenario where its base case used to be (i.e., 1,750p), implying >100% potential upside.

In its updated base case, Jefferies reduced its price target by 22% (from 1,750p to 1,350p), with the most material move being the cost of equity used for new business, which we lift from 15% to 20%. 

Jefferies also removed all value from the back book of Chinese-guaranteed savings and made a deduction in Hong Kong for potential negative operating variances. Moving its near-term forecasts has only a minor contribution.

Given the substantial derating of the shares over the past 18 months (despite numerous growth surprises), and now a disappointing trading update, investors are more concerned with worst-case scenarios than upside potential. 

With that in mind, Jefferies revisits its forecasts and shifts its assumptions to more prudent levels. In the context of having relatively little (2 years) historical financial information for IFRS 17, Jefferies emphasised that the range of reasonable estimates is wider than it would usually be. 

Despite this shift in prudence, its estimates fall by only -8%, still a small amount relative to the share price. In this note, Jefferies lays out in detail all its assumption changes.

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