Diversified Financials and Insurance
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Senior Analyst
- Date posted:
- 31 March 2014, 12:02 PM
- Sectors Covered:
- Diversified Financials, Professional Services
The Diversified Financials sector has been the strongest ASX performer over the past 12 months (+40% gain), with company outlook statements supporting expectations of further improvement in investment markets.
Following the February reporting season, we have reviewed the key themes and our stock picks across both the Diversified Financials and Insurance sectors.
Four key themes
1. Improving top-line and leverage for the Div Fins
Improving funds flow and market activity has led to solid top-line growth across the sector. Earnings leverage is significant, and this was evidenced in results such as Perpetual (PPT), as well as AMP's and CGF's funds management divisions.
2. Domestic General Insurance cycle close to peak
After a period of very strong premium increases, IAG softened FY14 premium growth guidance late in 1H14. We prefer Suncorp (SUN) given its diversity.
3. Cost-out still a focus
Cost-out programs remain a focus, which should assist margins medium-term, especially if top-line growth is sustained. Cost out programs include PPT ($50m by FY15); SUN ($225m by FY16); AMP ($200m by FY16); and QBE (expected 1% improvement in the expense ratio in FY14/15).
4. Capital positions solid
Suncorp (SUN) is an obvious candidate for capital management, however capital positions remain broadly strong across the insurers.
Four key stock picks
1. Suncorp Group (SUN) - buy as a portfolio holding
Special dividends are a key attraction. SUN is offering a FY14 gross dividend yield of 10.7%.
2. QBE Insurance (QBE) - taking a longer-term view
Some inherent risk remains with the QBE turnaround, however strong leverage to increasing global interest rates is appealing longer-term.
3. Macquarie Group (MQG) - buy on market pull-backs
MQG is well capitalised to pursue growth; a beneficiary of a lower AUD; and is seeing improved global capital and commodity markets.
4. Challenger Group (CGF) - potential for PE and dividend re-rating
CGF has a strong retirement income structural shift behind the business. This, combined with an undemanding PE (10x FY15), increased dividend payout ratio and franking over the next two years should see further performance.
More information
Morgans clients can access our detailed research on a number of companies in the Diversified Financials and Insurance sector. If you are interested in finding out more, please contact your nearest Morgans office.
Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.