- Suncorp Group's (SUN) FY17 cash NPAT of A$1,145m was ~4% below consensus of A$1,194m.
- SUN achieved a 12% 2H17 underlying insurance margin (UITR), although the calculation was not straightforward with several add backs.
- Guidance on spending associated with the marketplace strategy and the timeline for achieving the bank cost-to-income target appear to have changed.
Suncorp's FY17 cash NPAT of A$1,145m was ~4% below consensus (Morgans est. A$1,232m). We attribute the slightly lower than expected result to higher claims affecting the New Zealand performance and also a softer bank result than expected on higher costs. SUN's 2H17 dividend of 40cps was in-line with consensus, giving an FY17 payout ratio of ~82%.
SUN has announced an additional A$100m investment in FY18 on its marketplace strategy, with a group wide business improvement program also being undertaken to drive cost benefits from FY19.
A 12% 2H17 UITR – or was it?
At its early June investor day, Suncorp guided to an expected 2H17 underlying insurance margin (UITR) of 12%. While the company has reported achieving this figure, its UITR calculation was somewhat controversial benefiting from a ~A$50m add back of a reinsurance purchase and from the lowering of superimposed inflation assumptions in CTP (0.2% UITR benefit). This allows for some questioning of the actual UITR improvement seen in SUN.
Either way, management have indicated that with a A$72m increase in the FY18 natural hazard budget, and recent QLD CTP price reductions offsetting other price increases, achieving SUN's ~12% UITR in FY18 will be difficult.
Some clear changes in market guidance
We feel there were some changes in Suncorp's broad guidance to the market. As recently as the investor day in early June, SUN was indicating its marketplace strategy would be funded from within its existing cost base. While SUN believes this program is progressing well and warrants acceleration. Initial growth in customer numbers appears encouraging, but it does remain hard from outside SUN to attribute direct P&L value to this program at present.
On the bank, with the 2H17 cost-to-income (CI) ratio rising to ~53.9% (1H17 was 51.4%) due to factors like SUN currently needing to run two core platforms, management have indicated the 50% target remains more medium term.
We downgrade our EPS forecasts by 10% in FY18F and by 2% in FY19F. Our earnings changes reflect the A$100m (post tax) marketplace strategy investment and a slight lowering of general insurance and banking forecasts. Our valuation remains largely unchanged with our earnings changes offset by a valuation roll-forward.
Proving up the marketplace strategy could result in a re-rating, but at this point in the cycle we see Suncorp as fair value.
We retain our Hold recommendation.
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