Financial Services: Reporting season wrap

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
08 September 2021, 8:00 AM
Sectors Covered:
Insurance, Diversified Financials

  • In this report we summarise our key takeaways from the Insurance and Diversified Financials reporting season.
  • We saw the strongest results across our coverage from QBE, SUN, TYR and some of our micro-cap names (KSL, GDG and MME). On disappointments, LNK stands out here, with its flat FY22 earnings guidance (on higher investment spend) going against market expectations for a solid earnings recovery in FY22.
  • Our sector ADD calls are TYR, MME, QBE, IAG, GDG, Z1P, KSL, CGF and LNK (in order of preference). We maintain a REDUCE recommendation on ASX on valuation grounds.

General Insurers – QBE and SUN the best results

Counter to recent history, where IAG has typically been the standout general insurer (GI), it was QBE and SUN that produced the strongest August GI results, in our view.

Indeed, QBE posted its best combined operating ratio in almost a decade (93.3% vs 97.4% in the pcp), together with 20% constant currency GWP growth (including 7% volume growth).

SUN impressed with a large capital return (8cps special dividend and a A$250m buyback), and stronger FY21 GWP growth than IAG (6.9% vs 3.6%), driven by superior Australian home and motor premium rates increases (4.5% and 7.1% vs 5.7% and 3.6%).

Health Insurers – Favourable claims environment continues

In FY21, both MPL and NHF benefitted from the continuing favourable claims environment and CV19 provision releases, producing strong Health Insurance (HI) business margins. For NHF, however, there does continue to be an offset from CV19 weakness in other divisions (IIHI and travel).

Outside of that, our key HI sector takeaway was MPL delivering its best policyholder growth in over a decade (~3.5%, ex CV19 adjustments, vs 0.6% in the pcp), with guidance for a similar result in FY22 (supported by an improved overall industry growth backdrop).

Larger Diversified Financials – TYR the standout, while LNK disappoints

We saw TYR’s FY21 result as the best amongst our larger diversified financials stock coverage. TYR produced its first ever positive full year underlying EBITDA result (A$14m), up strongly on pcp (-A$4m), which highlights a de-risked TYR story overall, in our view.

Recent TYR merchant applications (May and June of 1.2k1.4k respectively vs the FY21 average = 1k per month) also pointed to good business momentum and limited continuing impacts from the terminal outage incident.

On disappointments LNK probably stands out, with its flat FY22 EBIT guidance being against market expectations for a solid return to growth.

Diversified Financials micro caps – generally good results

Our micro-cap stock coverage generally saw good result performances, in our view. This was highlighted by: KSL – delivering 15% NPAT growth on pcp on lower costs and a halving of the bad debt expense (~PGK11m vs PGK5m in pcp);

GDG – +20% FY21 Investment bond NPAT growth and record sales (A$404m, +22% on pcp) plus a strong initial Lonsec earnings contribution (EBITDA of A$9m, up 14% on pcp – 100% ownership basis); and MME – Cash NPAT of A$12m (+16% on pcp), driven by +149% FY21 loan book growth (to A$333m), and the net charge off rate declining 20bps to 5%.

Buy Now Pay Later

Headline APT and Z1P reported results were impacted by one-offs, e.g., asset revaluations. The key result themes for both players were strong revenue growth rates (+70%-150% on pcp) and largely stable key operating margins, but higherthan-expected operating expense growth tied to global expansion.

Post results, Z1P continues to trade at a large discount to APT (EV-to-sales 7x vs 24x).

Sector order preference

Our sector ADD calls are TYR, MME, QBE, IAG, GDG, Z1P, KSL, CGF and LNK (in order of preference). We maintain a REDUCE recommendation on ASX on valuation grounds.

We discuss our individual stock investment views overleaf but call out:

1) while IAG had the softest GI result, we see IAG’s share price as being a laggard in recovering last year’s market fall and we maintain our ADD call; and

2) while the Health Insurers continue to have claims tailwinds in FY22, we see both players as largely fairly valued (FY22F PEs of 21x and 23x, respectively) post good recent share price runs.

Find out more

We share the full list of stocks with material upcoming catalysts and share our analysts' comments in our full research note.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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