Prudential (LSE: PRU) shares have gained a lot of ground over the past year. But this does not have to mean there is no value left in them.
The business is delivering strong signs of sharply rising earnings momentum across its core Asian markets. And its improving cash generation adds further support to an upwards re-rating.
So what sort of higher valuation are we looking at?
What are the growth drivers for a higher price?
A higher valuation can only be justified if the growth engine is firing strongly. A risk to this for Prudential is any slowdown in key Asian markets, particularly Hong Kong or mainland China. Another is any sustained rise in healthcare costs, which could also squeeze its margins.
That said, analysts forecast its earnings will grow by an average of 20.9% a year over the medium term at least. The projections look an underestimate to me, given the firm’s last set of major results (full-year 2025 released on 18 March 2026).
These saw IFRS profit after tax soar 69% year on year to $4.119bn (£3.07bn). This illustrated the benefit of rising productivity, stronger bancassurance margins and sustained demand across Greater China and Asia.
New business profit jumped 12% to $2.782bn, reflecting Prudential’s multi‑market distribution model and the continued expansion of higher‑margin health and protection products.
And operating free surplus cash flow generated from in‑force insurance and asset management grew 15% to $3.059bn. The rise underlined improved claims management and disciplined cost control.
What sort of valuation is ‘fair’ here?
Fair value for a stock reflects an underlying business’s key fundamentals. This is completely different from price, which is just a transitory marker of wherever the market decides to trade at any point.
It is important to know where a share’s fair value lies because historically, stock prices tend to converge to this value over time. And every savvy professional investor I have known uses discounted cash flow (DCF) analysis to ascertain where any stock’s fair value is.
It achieves this by projecting a business’s future cash flows and discounting them back to today. Where those projections become less certain, the discount rate applied increases.
Because different analysts’ assumptions in the modelling may differ, the outcomes can be more bullish or more bearish than others. Based on my own framework — including a 7.4% discount rate — Prudential looks 46% undervalued at its current £11.29 price.
That implies a fair value of £20.91, nearly double the price today. So, if markets continue drifting toward fair value and the DCF modelling holds good, this could be a terrific potential buying opportunity now.
My investment view
Prudential is delivering some of the strongest earnings momentum in the FTSE. IFRS profit, new business profit and operating free‑surplus cash flow are all rising at double‑digit rates.
And its core Asian markets continue driving higher‑margin growth, supported by expanding distribution and sustained demand across health and protection.
Yet despite this, the shares still trade at a massive discount to fair value by my reckoning. That huge disconnect makes them well worthy of investor attention, in my view.
I already have several holdings in the same sector, so will not buy another. Instead, I am looking at similarly deeply undervalued stocks, but with high yields as well, in other sectors.
Should you invest £5,000 in Prudential Plc right now?
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Simon Watkins does not hold any positions in the companies mentioned.
