Suncorp Group: Credible underneath

About the author:

Author name:

By Richard Coles

Job title:

Senior Analyst

Date posted:

09 February 2023, 7:00 AM

Sectors Covered:

Insurance, Diversified Financials

• Suncorp Group's (ASX:SUN) 1H23 cash NPAT (A$560m) was +63% on the pcp, but -7% below company compiled consensus (A$599m). 
• Whilst the result was a headline NPAT miss, we actually thought SUN delivered a credible 1H23 performance. Indeed, SUN’s 1H23 underlying insurance margin performance (10%, flat on 2H22) compared favourably to IAG’s pre-announced numbers (a -4% UIM decline for the half), and SUN’s bank result was strong on all key metrics.
• We lift our SUN FY23F/FY24F EPS by 6%-8%. Changes to our numbers reflect a lift in both insurance and bank earnings. Our price target rises to (login to view).
• We see SUN trading on 11.5x FY24F earnings and a 6% dividend yield as offering reasonable value at current levels. ADD maintained.

Event

SUN’s 1H23 cash NPAT (A$560m) was +63% on the pcp, but -7% below company compiled consensus (A$599m). The 1H23 dividend of A33cps was slightly above consensus (A32.5cps). 

By division, the NPAT results were below consensus in Australian Insurance (A$276m vs A$307m) and New Zealand (A$83m versus A$122m), but above in the Bank (A$256m versus A$227m).

SUN has re-affirmed its key guidance parameters for FY23, e.g. an underlying insurance margin (UIM) of 10%-12%, a bank cost-to-income (CTI) ratio around 50%, and group operating expenses of ~A$2.7bn. The bank sale remains on track to complete in the second half of the calendar year, pending regulatory approval.

Overall, whilst the result was a headline NPAT miss, we actually thought SUN delivered a credible 1H23 performance. Indeed, SUN’s 1H23 underlying insurance margin performance (10%, flat on 2H22) compared favourably to IAG’s pre-announced numbers (a -4% UIM decline for the half), and SUN’s bank result was strong on all key metrics.

The good

1) General insurance top line growth was robust on pcp, e.g. Australian insurance +9%, and NZ +12%. SUN saw continued unit growth in key Australian home and motor classes of +1%-3% respectively.

2) SUN’s 1H23 group UIM of 10% (flat on 2H22), was a reasonable effort given clear headwinds, with management expecting a stronger UIM result in 2H23 (towards the top end of the 10%-12% target range).

3) The bank result was solid on all measures, e.g. 10% loan growth, almost no bad debts, NIM +13bps and a CTI ratio of 50% (1H22 57.5%).

4) SUN’s excess capital level (above target, ex div) was A$412m versus A$82m in 2H22, with some timing impacts from last half reversing.

5) Reserve releases in Australia were 1.6% of NEP, broadly in-line with SUN’s long-run target.

The not so good

1) The headline group NPAT result was 7% below consensus.

2) Reported insurance results were again affected by hazard claims (A$679m) which were ~A$100m above allowances.

3) Higher working claims in motor impacted both the Australian and New Zealand combined ratios by 3%-5%.

4) The NZ business saw a NZ$12m provision top-up related to the Canterbury earthquake claims and development on property claims.

5) The bank CTI is expected to be slightly higher in 2H23 as the NIM retracts.

6) the NZ flood will cost IAG NZ$50m in 2H23.

Changes to forecasts

We lift our SUN FY23F/FY24F EPS by 6%-8%. Changes to our numbers reflect a lift in both insurance and bank earnings. Our PT rises to (login to view).

Investment view

SUN management continue to execute well and appear on track to deliver key FY23 strategic priorities. Strong price rises remain supportive of margins near term, and SUN appears well positioned for when the headwinds of inflation and bad weather ease, in our view.

With SUN trading on 11.5x FY24F earnings and a 6% dividend yield, we see it as reasonable value at current levels. ADD.

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