Suncorp Group: A solid result against a tough backdrop

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
09 February 2021, 4:00 PM
Sectors Covered:
Insurance and Diversified Financials

  • Suncorp Group's (ASX:SUN) 1H21 cash earnings (A$509m) were 11% above company-compiled consensus (A$445m) and up 39% on pcp.
  • The 1H21 result beat consensus expectations in all key divisions. Management has also given more detail on its three-year plan which is aimed at driving growth and efficiency.
  • Overall, we saw this as a solid 1H21 result against a difficult backdrop, with broader trends pointing to an improving earnings trajectory into FY22.
  • We upgrade our FY21F/FY22F EPS by ~10% reflecting a range factors including higher GWP growth forecasts, and lower banking bad debts, etc. Our PT is upgraded (login to view revised price target). ADD maintained.

Result summary

SUN’s 1H21 cash earnings (A$509m) were 11% above company-compiled consensus (A$445m) and up 39% on pcp. The 1H21 dividend of 26cps was 18% above consensus (22cps).

The 1H21 result beat consensus expectations in all key divisions, e.g. Australia Insurance, NZ etc.

SUN has also provided more detail on its current three-year plan which is focused on driving growth and efficiency through automation and digitisation. The target of this plan being to achieve sustainable returns above SUN’s through-the-cycle cost of equity.

Overall, we saw this as a solid 1H21 result against a difficult backdrop, with broader trends pointing to an improving earnings trajectory into FY22.

The good

  1. Australian Insurance saw solid GWP growth of 5%-6% in home and motor insurance classes (including 2% unit growth in home insurance);
  2. Group operating expenses of A$1.3bn were flat on the pcp;
  3. The bank delivered a solid result with NPAT up 11% on pcp, assisted by a strong NIM performance (204bps, +12bps on pcp) and reduced impairments on an improving economic outlook (3bps as a % of GLA);
  4. SUN’s excess capital level (+A$1bn) is extremely robust and potentially allows for special dividends as early as the FY21 full year result in our view; and
  5. SUN continues to see strong positive reserve releases (~3% of NEP, ex Business Interruption claims).

The bad

  1. While headwinds like higher reinsurance costs etc had been well flagged, they did reduce SUN’s underlying insurance margin from 9.3% in the pcp to 7.1% (underlying basis);
  2. In the bank, the home lending portfolio contracted ~1.6% for the half and the cost-income-ratio remains high (56%);
  3. Group expenses will stay more elevated in FY21 & FY22 (~A$2.8bn) as part of the three-year plan before retracting to a lower level (A$2.7bn in FY23); and
  4. Some skepticism exists about achieving the three-year plan targets, particularly a banking cost-to-income ratio of 50%.

Changes to forecasts and investment view

We upgrade our FY21F/FY22F EPS by ~10% reflecting a range factors like higher GWP growth forecasts and lower banking bad debts, etc. Our PT is upgraded (login to view revised price target).

We continue to believe SUN has weathered the COVID downturn relatively well, with clear earnings upside existing from here as management reprices SUN’s insurance book and the economic environment improves. ADD maintained.

Find out more

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