Portfolio Update – Prudential Disposal & HSBC Re-purchase

How we are playing the two high growth financials on our doorstep

 

It is frequently frustrating when trying to find exposure to faster growing sections of the global
economy, that the investment that best fits is frequently domiciled in a mature economy,
rather than in an Emerging Market. Sometimes there are local alternatives, but they can be
eliminated by valuation, financial weakness, poor transparency or governance concerns. This
blog concerns two such businesses that happen to be domiciled in the UK.

Post the Covid outbreak last March, shares in Prudential collapsed. We had the business on
our radar for a while and welcomed the simplification of the business model, divestment of
non-core areas and focus on growth in Emerging Markets. We initiated a purchase at 730p.

Since then, Prudential has announced the demerger of Jackson, their US business, further
increasing their exposure to Africa and Asia. Consequently, the share price has rallied strongly
due to the investor reassessment of their prospects. However, we consider the valuation now
stretched and the yield too low. We sold the shares at 1484p in April 2021.

 

 

Conversely, we sold the holding in HSBC in March 2020 at 480p. While a supporter of the
long-term focus into Asia, we were concerned over the implementation of a new business
strategy at a time when key management was not in place. While talking a good game,
corporate actions were slow and the capital buffer did not provide us with the comfort we
desired.

Rolling on 12 months, HSBC feels like a rejuvenated company. There is an impressive
combination of Mark Tucker as Chairman, new CEO Noel Quinn and Ewen Stevenson as CFO.
Post a Zoom meeting, I had a feeling that things were happening. Costs are under control,
management is being streamlined and relocated to where the business is located. Capital is
sufficient with CET 1 ratio at 15.9% (target range 12% – 13%). But more importantly, it seems
as if management is finally playing to its strengths: growing wealth management in Asia and
withdrawing from underperforming areas, such as France.

The business is a major beneficiary of rising interest rates, with the loan to deposit ratio
currently only 63% and there is scope to reduce the asset intensity (Risk Weighted Assets) of
the business through further disposals. The Tangible Net Assets of the business is $7.75, or
around £5.57p in GBP.

 

 

Exposure to HK and China poses many risks and opportunities. However, with many of our
concerns now resolved, trading at around a 19% discount to TNAV, with scope to grow
dividends and repurchase shares, this was an attractive opportunity and we reinvested at
452p.

 

 

Further details available on request.

Graham Campbell (graham@saracenfundmanagers.com)
Bettina Edmondston (bettina@saracenfundmangers.com)

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