Questor: the Pru has been split in two. M&G is a buy but what of the other half?

Questor share tip: the insurance arm has established a strong presence in fast-growing markets in Asia and has great long-term prospects. There’s just one problem …

Ten days ago Questor gave its verdict on the newly listed M&G following its demerger from Prudential and advised readers to buy the stock for its generous and apparently secure dividend. But what of the other part of the old Pru?

M&G was the combined group’s fund management arm, while the other part, which has kept the Prudential name, is the insurer, now heavily focused on fast-growing markets in Asia and Africa.

We tipped the combined entity in April. Now that we have reassured readers that it’s safe to hold on to the M&G half, we’ll see what the future holds for the Pru.

We have enlisted the help of Mark Slater of Slater Investments, who also held the stock before its demerger and had to decide what to do with the two halves.

“Asia in particular is clearly a market that should provide massive demand,” he said. “As these large populations become wealthier, they will need Pru’s savings and insurance products.”

The Pru has top-three positions in nine out of 12 life insurance markets in Asia and Mr Slater said: “You can’t stop that momentum. The firm already has massive scale but is still growing fast.”

However, there is a cloud on the horizon. “Hong Kong is the one thing that worries me,” Mr Slater said. “It has already caused a bumpy ride for the Pru’s share price, although so far the unrest in the territory is affecting sentiment rather than fundamentals.

“But while it hasn’t yet had a significant impact on the business, it is a worry. There is a real possibility that people and capital will start to relocate to places such as Singapore.” He described the situation in Hong Kong as “pretty bad” with “a lot of discontent” and said it was “hard to see how it can be resolved quickly”.

“While I don’t think the territory is going to stop being a significant market for the Pru it is an issue the firm needs to manage, perhaps by putting more focus on other parts of the business.”

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But Mr Slater also said that, assuming the situation in Hong Kong was eventually resolved, Prudential looked cheap.

“If you value the more mature US arm at six times earnings and the faster-growing Asian business at a multiple in the mid-teens you get a total of about £43bn, or about 23pc more than today’s market value.”

“There is an enormously strong long-term case for this business and it’s perfectly sensible for existing holders to stick with the stock. Potential new buyers may prefer to wait for a resolution in Hong Kong.”

Questor says: hold

Ticker: PRU

Share price at close: £13.49

Update: Lok’nStore

Mark Slater also prompted our advice to buy Lok’nStore, the self-storage business, in October 2016. He still holds the stock.

He said: “The management team are very careful spenders – they own a large stake so it’s their own money.

Results last week showed all key metrics going in the right direction: net asset value was 11pc higher and profits on the ‘Ebitda’ measure were up by 12pc. The estate has got bigger and the eight new properties in the pipeline represent a big jump.

“Cash flow is also good and the dividend is growing nicely, while gearing is modest and the premium of 22.5pc is very low relative to peers – 60pc for Big Yellow and 77pc for Safestore.”

Questor says: hold

Ticker: LOK

Share price at close: 653p 

Update: Redcentric

Redcentric was originally tipped by Mr Slater’s father, the late Jim Slater.

Mr Slater jnr, a current holder of the stock, said earlier problems concerning fraud had been completely resolved, although the market was being cautious until it knew how large a fine the managed IT provider would have to pay as a result.

“The firm has recently beaten cash expectations and is doing all the right things,” he said. “In my view, once the fine is known, it will either buy a competitor or be bought, so I am holding on.” Questor will do the same.

Questor says: hold

Ticker: RCN

Share price at close: 81p

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