Suncorp Group: Capital light

About the author:

Author name:

By Richard Coles

Job title:

Senior Analyst

Date posted:

09 August 2022, 7:30 AM

Sectors Covered:

Insurance, Diversified Financials

• Suncorp Group's (ASX:SUN) FY22 cash NPAT was 1% above company compiled consensus but excluding lower-than-expected “other items”, total group divisional profits were ~5% below consensus.
• We would describe this result as a broadly solid underlying performance, with good 2H22 GWP growth and GI underlying margin expansion, but with the surprise of a larger-than-expected decline in SUN’s capital level in 2H22 (albeit the bulk of which will reverse over time).
• We lift our SUN FY23F/FY24F EPS by ~5% mainly on higher GWP growth expectations in future years. Our SOTP valuation falls to (login to view) reflecting SUN’s lower excess capital level. ADD maintained, we see SUN as inexpensive trading on ~12x FY23F PE and a 6% dividend yield.

Event

SUN’s FY22 cash NPAT (A$673m) was 1% above company compiled consensus (A$669m) but excluding lower “other items” than expected (-A$24m vs -A$70m per consensus), total group divisional profits (A$697m) were ~5% below consensus.

The 2H22 dividend (17cps) was also below consensus (20cps).

SUN re-affirmed key guidance metrics for FY23, e.g. an underlying insurance margin (UITR) of 10%-12%, a bank cost-to-income (CTI) ratio of 50%, etc. 

Overall we would describe this result as a broadly solid underlying performance, with good 2H22 GWP growth and GI underlying margin expansion, but with the surprise of a larger than expected decline in SUN’s capital level in 2H22 (albeit the bulk of which will reverse over time).

The good

1. Insurance Australia saw ~11% underlying GWP growth on pcp in 2H22 (FY22 9.2%) with NZ GWP growth also remaining robust (+14% on pcp).
2. Australia 2H22 GWP growth included excellent 4.5% unit growth in motor and 1% unit growth in home.
3. SUN’s UITR rose to 9.9% in 2H22 (ex Covid-19 impacts) from 9% in 1H22, a strong result given a growing overall inflation environment.
4. Strong 9% FY22 bank lending growth was accompanied by favourable credit quality, with SUN booking a A$14m impairment release.
5. Management re-affirmed key FY23 guidance metrics, with SUN also now guiding to mid-to-high single digit GWP growth in FY23.

The bad

1. SUN’s FY22 reported NPAT result (A$681m, -34% on pcp) was affected by natural hazard costs above allowances (+A$101m) and negative GI mark-to-market investment impacts from widening spreads (-A$190m vs +A$453m in the pcp).
2. SUN’s excess CET1 capital level fell significantly in 2H22 (to A$82m from A$632m at 1H22) due to investment market/reinsurance pricing impacts. While the bulk of this movement (-A$400m) will unwind over time (2-3 years), the size of the capital decline surprised us.
3. The bank CTI ratio remains high (FY22 57.5%), with the FY23 CTI target (50% exit rate) continuing to look like a stretch, in our view.
4. SUN noted one July weather event had already cost it A$100m.

Changes to forecasts

We lift our SUN FY23F/FY24F EPS by ~5% mainly on higher GWP growth expectations in future years.

Our SOTP valuation, however, falls to (login to view) reflecting SUN’s lower excess capital level.

Price catalysts

FY22 was a difficult year for SUN, affected by bad weather and investment market volatility, but we think SUN’s underlying business trends continue to broadly track in the right direction.

SUN will reap the full benefits of its efficiency program in FY23, and trading on ~12x FY23F PE and a ~6% dividend yield, we see the stock as reasonable value at current levels. ADD maintained.

Risks

Downside risks to our ADD call include:

1. Volatile weather
2. Claims inflation
3. Price competition
4. Negative investment market movements
5. A deterioration in the overall banking environment.

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