About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 08 August 2016, 11:58 AM
- Sectors Covered:
- Insurance, Diversified Financials
Suncorp Group's (SUN) FY16 cash NPAT of A$1.081m was ~5% below Bloomberg consensus. The 2H16 dividend of 38cps was just below consensus of 39cps, equating to a full year payout ratio of 80%. Overall the result was slightly weaker than expected in General Insurance, largely due to one-offs like hazard above allowances, which offset stronger Banking and Life Insurance results. The only negative result in our view, although flagged, was the large decline in SUN's excess CET1 capital position to ~A$350m (1H16 ~A$500m).
Six key takeaways
- Some initial progress on working claims, with the underlying General Insurance margin rising 0.3% in 2H16, excluding one-offs;
- Special dividends unlikely in the near term, with SUN's 2H16 excess capital position of A$350m strong, but not excessive in our view;
- A solid banking result, with an FY16 bad debt charge of just 3bps to gross loans and advances and a 1% improvement in the cost to income ratio in 2H16;
- Continued positive life insurance experience at A$13m in 2H16, with management believing recent changes to life insurance assumptions will only see a minor earnings impact;
- Acceptable top-line growth of 3%, driven by ~2% GWP growth, ~6% life in-force growth and 5% lending growth; and
- Underperformance of SUN's inflation linked bond portfolio, as evidenced by a -A$181m FY16 mark-to-market impact, although SUN believes reserve releases provide a natural hedge to ILBs.
We saw SUN's FY16 result as solid, showing some momentum in fixing the working claims issue in General Insurance. However, the stock has run strongly in recent months and we see the current 14x FY17F PE multiple as fair value. With further special dividends likely to be off the table (in our view) in the near term, a stock re-rating now relies on proving up SUN's new customer focused growth strategy. That could take time.
We maintain our Hold recommendation.
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