Merrill adds Prudential to 'Europe 1' list

Bank of America Merrill Lynch reiterated its ‘buy’ rating on Prudential, adding the stock to its Europe 1 List, which is its department-wide list of best research ideas.

Merrill pointed out the shares have dropped 26% this year in US dollar terms and said its analysis of the group’s closest peers suggests this is around 20% too much.

“Even on consensus estimates, which we think are 6-7% too low, the shares trade in line with the sector average price-to-earnings. This is despite offering double (9-10%) the sector average earnings per share growth over our forecasting period.”

The bank said it sees around 34% total return potential from the shares, adding that the market is not factoring clear positives, such as the impact of the strengthening greenback, as around two-thirds of Prudential’s earnings are USD or USD-linked.

“The S&P, HSI and FTSE are all up year-to-date. Yet 2017 consensus EPS estimates for Pru have not reacted (actually down YTD). This suggests to us the market is not yet factoring in good news and that now is a particularly attractive buying opportunity.”

Merrill said the stock was suffering mostly on the back of noise around US and Asian regulation, neither of which it reckons present a serious risk to the business.

“We think earnings, solvency, and Asian growth could all surprise on the upside in H2,” it said.

The bank has a 1,710p price target on Pru.

At 0920 GMT, the shares were up 1.5% to 1,324.50p.