Suncorp Group: A good display
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 10 August 2021, 9:00 AM
- Sectors Covered:
- Insurance, Diversified Financials
- Suncorp Group's (ASX:SUN) FY21 NPAT (A$1.03bn) was 8% above company compiled consensus.
- The highlight of the result was the stronger-than-expected capital returns, with the 2H21 dividend of 40cps being 5cps above consensus, while SUN also declared an 8cps special dividend and a A$250m buyback.
- We leave our SUN FY22F/FY23F cash EPS largely unchanged, with slightly reduced earnings forecasts (1%-2%) offset by incorporation of the buyback into our numbers. Our PT rises to (login to view).
- We saw this as a strong result from SUN and we remain optimistic on earnings improvement over the next few years. However, with SUN trading in line with our valuation, we see better value elsewhere in the sector and retain our Hold call.
SUN’s FY21 reported NPAT (A$1.03bn) was 8% above company compiled consensus. The result beat market expectations in both of SUN’s two largest divisions – Insurance Australia (NPAT of A$547m vs consensus of A$463m) and the Bank (NPAT of A$419m vs consensus of A$383m).
The highlight of the result was the stronger-than-expected capital returns, with the 2H21 dividend of 40cps being 5cps above consensus, while SUN also declared an 8cps special dividend and a A$250m buyback.
All in all, it was a strong result for SUN, broadly exceeding expectations across the board and setting the base for an improving earnings growth outlook in FY22/FY23.
What we liked
2H21 capital returns exceeded expectations (MorgansE = A$200m buyback) with SUN returning A$1.2bn of total capital to shareholders in FY21. Post the capital return, SUN retains a robust group excess capital level of ~A$400m.
We had been expecting a broadly flat underlying insurance margin (UIM) into FY22, although management result call commentary did indicate some mild UIM improvement should occur, particularly in 2H22.
In Australian Insurance, FY21 GWP grew 5.5% on pcp (2H21: 7.5%), its highest annual level since 2013. This business also saw a strong investment income result (A$390m, +26% on pcp) driven by favourable mark-to-market movements tied to inflation-linked bonds and equities.
The 2H21 bank result was relatively robust with a net interest margin (2.09%) well above the target range (1.85%-1.95%), a A$49m COVID provision release assisting performance and the home lending portfolio returning to growth (+0.8% in 2H21).
Group reserve releases remained robust at 2.9% of NEP (1H21 3.2%) and group operating expenses of ~A$2.8bn were in-line with expectations.
The not so good
While in-line with guidance, full-year hazard claims of A$1.01bn did come in $60m above allowances.
The 2H21 bank cost-to-income (CTI) ratio (57.8%) was actually up on 1H21 (56.5%), with SUN’s 50% CTI target by FY23 still arguably a stretch, in our view.
New Zealand NPAT (NZ$215m) was down 17% on pcp, impacted by the highest natural hazard claims in 5 years. The FY22 NZ insurance margin performance is expected to be closer to FY21 (15%), which is down from the elevated levels of the recent past (~20%).
Changes to forecasts and investment view
We leave our SUN FY22F/FY23F cash EPS largely unchanged with slightly reduced earnings forecasts in these years (1%-2%) offset by incorporation of the buyback. Our PT rises to (login to view) on a valuation roll-forward and a lift to the SUN bank multiple (~14x) in line with increased peer group valuations.
We think SUN’s recent investor briefings highlighted a clear strategic plan to drive improved divisional earnings from here. The insurance pricing environment also remains relatively strong, while the overall banking environment continues to improve. However with SUN largely trading in-line with our valuation, we retain our HOLD call, seeing better value elsewhere in the sector.
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