Suncorp Group: Improvement will take time

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
12 February 2020, 10:45 AM
Sectors Covered:
Insurance and Diversified Financials

  • SUN's 1H20 cash earnings (A$365m) were 13% below company compiled consensus (A$421m).
  • In our view, SUN's result can be summarised as soft overall, with the underlying insurance margin retracting more than expected and cost pressures continuing to be evident in the bank.
  • We lower our SUN FY20F/FY21F EPS by 8%-12%, mainly on reduced group insurance margin forecasts. Our PT falls (Morgans clients can login to view detailed reports and price targets) and we move SUN to a Hold.
  • We believe the SUN management team's strategy of reducing earnings volatility and improving core business performance is the correct one. However, headwinds remain and the timeline to a meaningful uplift in business trajectory is difficult to call, in our view.

Result summary

SUN's 1H20 cash earnings (A$365m) were 13% below company compiled consensus (A$421m). The 1H20 dividend of 26cps was in-line with pcp and represented an elevated payout ratio (93%).

The result was broadly in-line with market expectations in the banking and NZ divisions, but was well below expectations in Australia Insurance (NPAT A$123m vs consensus A$177m).

In our view, SUN's result can be summarised as soft overall, with the underlying insurance margin (UIM) retracting more than expected and cost pressures continuing to be evident in the bank.

The good

  1. SUN's group excess capital level (A$691m) is strong and should see SUN return capital post bedding down its FY21 reinsurance program, in our view
  2. SUN delivered positive unit growth in its consumer business (+~1% in both home and motor classes) reversing a trend of consistent decline
  3. The banking NIM improved 2bps benefitting from strong at-call deposit growth, while 1H20 banking bad debts were negligible
  4. Group expenses of A$1.3bn were broadly flat on the 2H19 level
  5. SUN reaffirmed it still expects FY20 net hazards to come in around its target allowance level (A$820m) despite further recent bad weather.

The bad

  1. While a decline in the group UIM (1H20 9.3%) had been flagged, it was significantly larger than we expected due to unanticipated elements, e.g. higher claims handling costs and PV adjustments to investment income
  2. Bank lending retracted -1.5% over 1H20, while the bank cost-to-income ratio rose significantly (~59.5% vs 56.5% in 2H19) on softer income growth and higher regulatory costs
  3. FY20 group expense guidance (A$2.7bn ex FSL) implies costs will be higher in 2H20, while elevated regulatory costs are now expected to take longer to decline post FY20
  4. SUN acknowledged lifting the UIM back closer towards its historic 12% target is a FY22/FY23 story at best

Changes to forecasts and investment view

We lower our SUN FY20F/FY21F EPS by 8%-12%, mainly on lower group IM forecasts.

We downgrade our PT (Morgans clients can login to view detailed reports and price targets) and move SUN to a Hold call.

We believe the management team's strategy of reducing earnings volatility and improving core business performance is the correct one. However, headwinds remain and the timeline to a meaningful uplift in business trajectory remains difficult to call.

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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