Suncorp Group: A better direction being painted

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
09 August 2019, 6:15 PM
Sectors Covered:
Insurance and Diversified Financials

  • SUN's FY19 cash NPAT of A$1.11bn was broadly in-line with consensus ($1.30bn). 
  • The key result positives were a lift in expected overall BIP net benefits and a clearer strategic direction being painted by the acting CEO.
  • However, FY20 does shape as a tough year with headwinds on multiple fronts.
  • While SUN is going through a transition phase this year, we ultimately think steps to refocus and de-risk the business will drive a re-rating over time. With 10% TSR upside on a 12-month basis, we maintain our ADD recommendation.

What happened

SUN's FY19 cash NPAT of A$1.11bn was broadly in-line with consensus ($1.30bn).

Overall, the result can be summarised as slightly below expectations in Australia Insurance, and on corporate costs, offset by beats in the bank and NZ.

The final dividend of 44cps (80% FY19 payout ratio) appeared below consensus (Bloomberg 48cps) however, as expected, SUN did announce a A$506m (39cps) pro-rata return of capital from the remaining Australian life business sale proceeds.

The good 

  1. the result lacked any large negatives surprises, with strong reinsurance protections seeing a large improvement in the 2H19 group reported insurance margin (IM - 15.8%) vs 1H19 (7.4%);
  2. the NZ result was expectational across the board with 8% FY19 GWP growth and a 20% IM produced;
  3. FY20 BIP net benefits of A$280m exceeded guidance (A$225m), and total expected program net benefits were also upgraded to A$380m (previously A$329m);
  4. the key priorities outlined by the acting CEO were, in our view, what the market wants to hear, e.g. refocusing on the core businesses, targeted growth and leveraging digital, together with driving further operational efficiencies, etc; and
  5. SUN's FY20 excess capital position of A$484m is robust, with management indicating the payout ratio will likely remain at the top of SUN's target range near term (60%-80%). 

The bad 

  1. FY20 shapes as a difficult year for SUN, with pressures existing across the bank and the general insurance business. We expect the group underlying IM will be well below SUN's 12% target (MorgansE 10.8%) on factors like lower bond yields and higher hazard allowances/reinsurance costs, etc;
  2. There was no real sign of improving momentum in unit growth in Australian home and motor insurance, with units down ~1.6%-1.7% respectively for FY19; and;
  3. FY20 group operating expenses (underlying) are expected to be in-line with FY19 (~$2.7bn), with BIP program benefits and removal of Australian life business opex, offset by increased project spend and other factors, e.g. inflation, IT cloud costs, etc 

Investment view

We downgrade FY20F/FY21F EPS by 2%-6% and our SUN PT is lowered (Morgans clients can login to view detailed reports and price targets).

While SUN is going through a transition phase this year, we ultimately think steps to refocus and de-risk the business will drive a re-rating over time. With 10% TSR upside on a 12-month basis, we maintain our ADD recommendation. 

More information

Morgans clients can login to view our detailed report and share price target for Suncorp Group (SUN). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

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.

 



 

 

 

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