Prudential's growth outlook dims with Malaysian stake adjustment

This development reduces Prudential’s IFRS equity by nearly 5%.

Prudential dampens analysts' expectations for its growth in Malaysia’s market after the news of its announcement it will recognise a 49% minority stake in its Malaysian subsidiary, Sri Han Suria Sdn Bhd (SHS). 

This development reduces Prudential’s IFRS equity by nearly 5% and its embedded value by approximately 4%, Jefferies Equity Research said. Despite previously optimistic growth expectations for Malaysia, this situation diminishes the anticipated benefits and raises the company’s risk profile.

Despite the significant impact on Prudential’s equity, the market reaction has been muted. Jefferies notes that investors seem to be focusing on macroeconomic and geopolitical risks, overlooking fundamental news. 

The lack of market response highlights a broader trend of discounting fundamental valuations. Jefferies remains confident that fundamental valuation will regain importance, though the timing of this shift is uncertain.

Prudential holds a 51% stake in SHS, which owns Prudential Assurance Malaysia Berhad (PAMB), while Detik Ria Sdn Bhd (Detik Ria) owns the remaining 49%. 

Under agreements from 2002 and 2009, Prudential had the option to acquire Detik Ria's 49% stake. Detik Ria exercised this option in 2008 and was paid over ten years. However, the share transfer was not completed, leading Prudential to file a lawsuit in 2019.

Whilst earlier court decisions favoured Prudential, Malaysia’s Federal Court overturned these rulings this year.

As a result, Prudential will now report the 49% stake as a non-controlling interest. This adjustment impacts the IFRS equity and European Embedded Value but does not affect operations or the Takaful business.

The Federal Court’s decision suggests that central bank approval alone was insufficient without the finance minister's endorsement, as required by the Insurance Act of 1996. 

Detik Ria has been directed to return $24.0m (RM109.205m) in part payments with 5% interest since September 2019, and Prudential must cover $43,881.4 (RM200,000) in costs. 

Detik Ria’s counsel claims that dividends during this period totaled $600m (RM2.72b), asserting that the company is owed $290m (RM1.3b) for its 49% stake.

($1.00 = RM4.56)