Suncorp Group: Underlying business momentum is encouraging

About the author:

Author name:

By Richard Coles

Job title:

Senior Analyst

Date posted:

09 February 2022, 10:00 AM

Sectors Covered:

Insurance, Diversified Financials

• Suncorp Group's (ASX:SUN) 1H22 NPAT (A$388m, down 21% on pcp) was 22% above company-compiled consensus (A$316m) and the 1H22 dividend (23cps) was 26% above consensus (17cps).
• Overall we saw this as a solid 1H22 result, highlighted by improving top line momentum across the group and a positive trajectory being seen in SUN’s key underlying insurance margin (UITR).
• We upgrade our SUN FY22F EPS by ~8%, with nominal changes to other future years earnings (~+/-1%-2%). Our PT rises to (login to view) on our earnings changes and a valuation roll-forward.
• Move to an ADD recommendation.
• We see upside on solid business momentum and cost-out plans into FY23, and think SUN’s current valuation of 13.5x FY23F earnings is undemanding.

Event

Suncorp Group's (ASX:SUN) 1H22 NPAT (A$388m, down 21% on pcp) was 22% above company-compiled consensus (A$316m) and the 1H22 dividend (23cps) was 26% above consensus (17cps).

Overall we saw this as a solid 1H22 result, highlighted by improving top line momentum across the group and a positive trajectory being seen in SUN’s key underlying insurance margin (UITR). In our view, SUN appears well poised to benefit from large tailwinds from its efficiency program in FY23.

The good

1. Insurance Australia GWP growth of 7.5% on pcp was robust. Both key home and motor insurance classes saw GWP growth of 8% on pcp, including unit growth of 1% and 3% respectively.
2. The group UITR of 8% (ex CV-19 impacts) was up ~50bs on the 2H21 level (7.4%), benefitting from solid top line growth and improved management of working claims.
3. SUN again saw healthy reserve releases of ~2% of NEP, above its target level of 1.5%.
4. Bank positives included 1H22 lending growth of 5% annualised, well above the 2H21 level of 1.5%, and a positive impairment expense (+A$16m) as collective provisions were released reflecting improving macro conditions.
5. SUN has a strong balance sheet with ~A$500m of excess CET1 capital at the group level, which obviously supported a higher 1H22 dividend than expected.

The not so good

1. As had been well flagged, SUN’s reported insurance result was heavily affected by elevated natural hazard claims (A$695m vs the 1H22 hazard budget of A$490m).
2. The SUN bank 1H22 net interest margin (197bps) declined 12bps over the half with competition called out as a key factor.
3. SUN’s 1H22 bank cost-to-income ratio (~56.5%, ex spending on strategic initiatives) was largely unchanged on pcp, with the target level of 50% by 2H23 still looking a stretch in our view.
4. 1H22 Insurance Australia total Investment income was just A$4m, well down on pcp (A$305m), reflecting rising bond yields and widening spreads, etc.

Changes to forecasts

We upgrade our SUN FY22F EPS by ~8%, with nominal changes to other future years earnings (~+/-1%-2%). Our PT rises to $13.19 on our earnings changes and a valuation roll-forward.

Investment view

We move SUN to an ADD recommendation (from Hold). We think SUN has weathered the difficult Covid-19 period well, and signs are encouraging of solid momentum in regards to underlying business growth.

SUN is also poised to reap the full benefits of its efficiency program in FY23, while its banking operations should be supported by an improving economic environment. Trading on 13.5x FY23F PE and a ~5% dividend yield, we see SUN’s valuation as undemanding.

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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