Insurance - CompositeâAustraliaâEquity researchâFebruary 15, 2018. IMPORTANT DISCLOSURES ... the Australia general
Insurance - Composite│Australia│Equity research│February 15, 2018
Suncorp Group Glass half empty or half full
ADD (previously HOLD) Current price: Target price: Previous target: Up/downside: Reuters: Bloomberg: Market cap:
A$13.00 A$14.31 A$14.46 10.1% SUN.AX SUN AU US$13,249m A$16,848m US$31.72m A$42.71m 1,277m 100.0%
Average daily turnover: Current shares o/s Free float: Price Close
Relative to S&P/ASX 200 (RHS)
15.50 15.00 14.50 14.00 13.50 13.00 12.50 12.00 20
116.0 112.4 108.9 105.3 101.7 98.1 94.6 91.0
■ The result disappointment was a ~2% decline in SUN’s underlying insurance margin (ITR) which was larger than expected.
■ Management, however, are forecasting a strong recovery in earnings from here. We think FY19 guidance for a group underlying ITR above 12% is achievable.
■ We lower FY18F EPS by 12%, but make nominal changes to future year earnings. We move SUN to an ADD recommendation, PT A$14.31. Trading on ~13x FY19 PE, a 5 PE point discount to IAG, we see some value now.
Result Summary SUN’s 1H18 cash NPAT of A$472m was ~8% below consensus of A$511m (Morgans estimate A$532m). The 1H18 dividend of 33cps was slightly above consensus of 31cps. Broadly, SUN’s bank, NZ and life insurance results were largely as expected, however the Australia general insurance (GI) profit was well below expectations. The driver of this was a rise in net incurred claims costs, which lowered SUN’s group underlying ITR to 9.4% (ex Business Improvement costs) from 12% in 2H17.
Glass half empty view
15 10
Vol m
■ SUN’s 1H18 cash NPAT of A$472m was ~8% below consensus (A$511m).
5 Feb-17
May-17
Aug-17
Nov-17
Source: Bloomberg
Price performance Absolute (%) Relative (%)
1M -3.6 -0.8
3M -6.8 -6.4
12M -4.6 -6.3
The size of the decline in SUN’s underlying ITR certainly caught us by surprise. While some factors were expected like higher natural hazard budget costs and others explainable, e.g. CTP reform costs, SUN’s ITR performance was poor compared to IAG’s ~1.5% improvement over 1H18. In our view, the key SUN ITR delta was a rise in GI operating expenses (ex BIP), which took ~1.2% off the margin (~A$50m). While we understand ~A$35m (0.7%) of these expenses are unlikely to reoccur (e.g. DAC, some regulatory imposts), they do raise some concerns on potential hidden SUN cost pressures.
Richard COLES
Glass half full view
T (61) 2 9043 7911
SUN management gave usually detailed guidance parameters for FY19. These pointed to a strong recovery in SUNs ITR to above 12% (and also a solid 2H18 uplift), while indicating the bank cost-to-income ratio would retract to ~50% (1H18 ~55%) on BIP benefits. We see a clear trajectory for SUN’s ITR to recover from here, ex-unforeseen factors, driven by solid recent price increases, the non-repeat of some 1H18 costs, and substantial BIP net cost benefits emerging (A$229m in just 2H18/FY19). Positively management also indicated they have made large improvements in dealing with Australian motor claims inflation, a significant recent problem area.
E
[email protected]
Changes to forecasts and investment view We downgrade SUN FY18F EPS by ~12%, but make nominal changes to future year earnings forecasts. Our price target is downgraded by 1% to A$14.31 with earnings changes offset by a valuation roll-forward. We move SUN to an ADD recommendation. While acknowledging the flaws into today’s result, we think this is the ITR low point. Significant reinsurance protections also support SUN’s 2H18 result and with SUN trading on ~13x FY19 PE (a 5 PE point discount to IAG) we see some value now. Financial Summary Gross Written Premium Net Premium (A$m) Cash Net Profit (A$m) Normalised EPS (A$) Normalised EPS Growth FD Normalised P/E (x) DPS (A$) Dividend Yield P/BV (x) ROE (%)
Jun-16A 7,803 6,893 1,089 83 -9.0% 15.6 68.0 5.2% 1.2 8.1%
Jun-17A 8,111 7,072 1,145 88 5.3% 14.8 73.0 5.6% 1.2 8.4%
Jun-18E 8,288 7,541 1,045 79 -10.3% 16.5 67.4 5.2% 1.2 7.6%
Jun-19E 8,620 7,779 1,349 101 27.8% 12.9 77.7 6.0% 1.2 9.6%
Jun-20E 8,878 8,012 1,459 109 7.9% 12.0 83.8 6.4% 1.2 10.2%
SOURCE: MORGANS ESTIMATES
IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP
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Insurance - Composite│Australia│Equity research│February 15, 2018
Figure 1: SUN Financial summary A S X c o de :
S UN S ha re pric e ( A $ ) :
No . o f skares (m): M arket cap (A $ m):
1,278 Reco mmendatio n: 16,609 Valuatio n:
$ 13 .0 0 A DD $ 14.31
G e ne ra l Ins ura nc e Gro ss Written premium
7,803
8,111
8,288
8,620
P rice target:
$ 14.31
Net earned premium
6,893
7,072
7,541
7,779
8,012
Upside/(do wnside):
10.0%
Net incurred claims
(5,099)
(4,923)
(5,445)
(5,583)
(5,860)
14.8
Operating expenses
(1,379)
FY18F P E Ke y f ina nc ia ls Repo rted NP A T (A $ m)
F Y 16 A
F Y 17 A
F Y 18 F
F Y 19 F
F Y20F
1,310
1,424
1,038
1,075
1,004
gro wth (%)
-8.4
3.6
-6.7
CA SH NP A T
1,089
1,145
1,045
1,349
gro wth (%)
-8.6
5.2
-8.8
29.2
EP S - Repo rted gro wth (%) Cash EP S - pre NRI & A dj. (A cps) gro wth (%)
79.6 -8.5
82.6 3.8
83.3
-8.4
87.8
78.7 -10.3
29.2 100.6 27.8
1,459 8.1 105.9 8.4
F Y 18 F
F Y 19 F F Y 2 0 F 8,878
(1,411)
(1,442)
(1,561)
(1,416)
236
205
202
181
256
Insurance Trading Result
619
912
738
961
1,029
Other inco me
71
65
97
73
106
690
977
835
1,034
1,135
Inco me tax
(200)
(288)
(239)
(296)
(325)
G e ne ra l ins ura nc e pro f it a f t e r t a x
490
689
596
738
8 10
68
34
55
55
60
558
723
651
793
870
1,378
P ro fit befo re tax
Lif e ins ura nc e pro f it a f t e r t a x Ins ura nc e pro f it a f t e r t a x
108.5 7.9
B a nk ing & We a lt h
68.0
73.0
67.4
77.7
83.8
Net interest inco me
P ayo ut ratio - P re NRI/Other A dj (%)
81.6
83.2
85.6
77.2
77.2
Net no n-interest icno me
Franking (%)
100
100
100
100
100
0
0
30
30
30
P ric ing m ult iple s
5.3
97.7
8.7
F Y 16 A F Y 17 A
Investment inco me - insurance funds
DP S (c)
Tax rate (%)
-9.0
75.6
30.6
P ro f it & lo s s ( A $ m )
1,129
1,131
1,214
1,299
88
76
68
72
78
(639)
(636)
(691)
(698)
(733)
P ro fit befo re impairment lo sses o n lo ans and advances 578
571
591
674
723
Impairment lo sses o n lo ans and advances
(7)
(28)
(43)
(64)
Operating expenses
B ank pro fit befo re tax
(16)
F Y 16 A
F Y 17 A
F Y 18 F
F Y 19 F
F Y20F
562
564
563
631
659
P rice/earnings ratio (x)
16.3
15.7
17.2
13.3
12.3
Inco me tax
(169)
(168)
(168)
(189)
(198)
Cash P /E
B a nk pro f it a f t e r t a x
393
396
395
442
461
25
4
12
12
12
4 18
400
407
454
473
N e w Z e a la nd Gro ss Written premium
15.6
14.8
16.5
12.9
12.0
P rice/bo o k value (x)
1.2
1.2
1.2
1.2
1.2
We a lt h pro f it a f t e r t a x
P rice/NTA (x)
2.2
2.1
2.1
2.0
1.9
B a nk ing & We a lt h pro f it a f t e r t a x
Dividend yield (%)
5.2
5.6
5.2
6.0
6.4
F Y 16 A
F Y 17 A
F Y 18 F
F Y 19 F
F Y20F
1,228
1,345
1,419
1,525
1,617
1.3
Net earned premium
1,045
1,099
1,138
1,224
1,297
Ke y ra t io s - re t urns Return o n A ssets
1.1
1.1
1.0
1.2
Repo rted ROE (%)
7.7
7.9
7.3
9.4
9.9
Net incurred claims
(562)
(693)
(631)
(707)
(763)
Cash ROE (%)
8.1
8.4
7.6
9.6
10.2
Operating expenses
(338)
(366)
(362)
(346)
(354)
18
13
11
10
13
163
53
157
180
194
Investment inco me - insurance funds Ke y ra t io s - A us t ra lia
F Y 16 A
F Y 17 A
F Y 18 F
F Y 19 F
F Y20F
Gro ss written premiums (%)
n/a
3.9
2.2
4.0
3.0
P ro fit befo re tax
Net earned premiums (%)
n/a
2.6
6.6
3.2
3.0
Inco me tax
Life in-fo rce gro wth (%)
0.0
(0.9)
0.2
1.5
1.6
G e ne ra l ins ura nc e pro f it a f t e r t a x
74.0
69.6
72.2
71.8
73.1
Co mmissio n ratio (%)
13.1
12.8
12.8
11.3
10.3
Expense ratio (%)
7.3
7.6
7.9
6.9
6.9
94.4
90.0
92.9
90.0
90.4
Other pro fit (lo ss) befo re tax
GI Insurance margin (%)
9.0
12.9
9.8
12.4
12.8
Inco me tax
Life planned pro fit margin to average info rce - %
0.0
2.3
3.0
2.5
2.6
F Y 16 A
F Y 17 A
F Y 18 F
F Y 19 F
F Y20F
G ro wt h
Other inco me
M a rgins Claims ratio (%)
Co mbined ratio (%)
Ke y ra t io s - N Z
Insurance Trading Result
Lif e ins ura nc e pro f it a f t e r t a x
G ro wt h
N Z pro f it a f t e r t a x P ro f it a f t e r t a x f ro m bus ine s s line s
O t he r pro f it ( lo s s ) a f t e r t a x C ash N P A T A cquisitio n amo rtisatio n (after tax)
Gro ss written premiums (%)
n/a
9.5
5.5
7.5
6.0
Net earned premiums (%)
n/a
5.2
3.6
7.5
6.0
Life in-fo rce gro wth (%)
n/a
7.0
5.7
5.6
5.5
M a rgins
R e po rt e d N P A T C a pit a l R a t io s
10
6
17
18
63
163
198
212
(51)
(18)
(51)
(62)
(66)
13 4
45
112
13 6
14 5
49
37
30
33
36
18 3
82
14 2
16 9
18 2
1,15 9
1,2 0 5
1,2 0 0
1,4 15
1,5 2 5
(76)
(58)
(62)
(62)
(62)
6
(2)
49
(4)
(4)
(70)
(60)
( 15 5 )
(66)
(66)
1,0 8 9
1,14 5
1,0 4 5
1,3 4 9
1,4 5 9
(51)
(70)
(41)
(39)
(35)
1,0 3 8
1,0 7 5
1,0 0 4
1,3 10
1,4 2 4
F Y 16 A F Y 17 A
F Y 18 F
F Y 19 F F Y 2 0 F
B a nk ing
Claims ratio (%)
53.8
63.1
55.4
57.8
58.8
CET1ratio
Co mmissio n ratio (%)
23.0
23.3
22.4
19.9
18.9
To tal capital ratio
Expense ratio (%)
21 185
9.2
9.2
9.0
9.0
9.1
13.5
14.6
13.3
13.2
13.2
9.4
10.0
9.4
8.4
8.4
GI Insurance margin (%)
15.6
4.8
13.8
14.7
14.9
G e ne ra l Ins ura nc e
Life planned pro fit margin to average in-fo rce - %
55.9
13.1
12.9
12.9
12.9
CET1ratio (x)
1.21
1.32
1.20
1.23
1.30
P CA Ratio x
1.67
1.77
1.62
1.63
1.69
346
377
88
214
410
Ke y ra t io s - T o t a l Ins ura nc e
F Y 16 A
F Y 17 A
F Y 18 F
F Y 19 F
F Y20F
Gro ss written premiums (%)
n/a
4.7
2.7
4.5
3.5
Net earned premiums (%)
n/a
2.9
6.2
3.7
3.4
Life in-fo rce gro wth (%) M a rgins
n/a
0.9
1.5
1.8
2.6
G I Ins ura nc e m a rgin ( %)
9 .9
11.8
10 .3
12 .7
13 .1
Underlying ITR (%)
10.6
11.5
10.7
12.0
12.7
4.8
4.8
5.3
5.1
5.2
G ro wt h
Life planned pro fit margin to average in-fo rce - %
G ro up Excess CET1capital (A $ m) P e r s ha re da t a Spo t no . o f shares (M ) B V per share (A $ ) NTA per share (A $ )
F Y 16 A F Y 17 A F Y 18 F F Y 19 F F Y 2 0 F 1,278 1,285 1,289 1,289 1,289 10.6
10.7
10.7
11.0
11.2
6.0
6.2
6.2
6.5
6.8
V a lua t io n a s s um pt io ns Ke y ra t io s - B a nk ing Lo an gro wth (%) Interest M argin (%)
F Y 16 A F Y 17 A 4.5 1.9
F Y 18 F F Y 19 F F Y 2 0 F 8.7 7.0 6.8
M e t ho do lo gy: S um o f pa rt s v a lua t io n
SOT P s
1.9
1.8
1.9
1.8
1.8
Co st To Inco me Ratio (%)
52.5
52.7
53.9
50.9
50.4
Co re B ank (P E multiple)
5,165
$ 4.02
12.0
B DD/A verage Gro ss Lo ans (%)
0.03
0.01
0.05
0.07
0.10
General Insurance (P E)
11,762
$ 9.15
12.0
1,822
$ 1.13
15.0
18 ,3 8 2
$ 14 .3 1 0.0%
Wealth M anagement (NTA ) G ro up E xpe ns e s Gro up Expenses (A $ m) Gro wth (%)
F Y 16 A F Y 17 A (2,669) (2,746) n/a
1.2
F Y 18 F (2,884) 6.6
F Y 19 F F Y 2 0 F (2,720) (2,709) 0.2
3.5
T o tal Disco unt (%) P ric e t a rge t
A$ m
A $ ps Im plie d F Y 18 F P E
$ 14 .3 1
SOURCE: MORGANS ESTIMATES
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Insurance - Composite│Australia│Equity research│February 15, 2018
Changes to forecasts and investment view We downgrade SUN FY18F EPS by ~12%, but make nominal changes to future year earnings forecasts. Our price target is downgraded by 1% to A$14.31 with earnings changes offset by a valuation roll-forward. We move SUN to an ADD recommendation. While acknowledging the flaws into today’s result, we think this is the ITR low point. Significant reinsurance protections also support SUN’s 2H18 result and with SUN trading on ~13x FY19 PE (a 5 PE point discount to IAG) we see some value now. Downside risks to our ADD call are; volatile weather particularly on the Eastern seaboard of Australia; 2) rising claims inflation; 3) increased pricing competition and; 4) volatile investment market movements. Figure 2: SUN - Changes to forecasts Total profit from business line Previous forecast Current forecast % change Growth Cash NPAT Previous forecast Current forecast % change Growth Cash EPS Previous forecast Current forecast % Change Growth DPS Previous forecast Current forecast % change Growth
FY16A
FY17A
FY18F
FY19F
FY20F
1,159 1,159 n/c -6.2%
1,205 1,205 n/c 4.0%
1,324 1,200 -9.4% -0.5%
1,403 1,415 0.9% 18.0%
1,469 1,525 3.8% 7.7%
1,089 1,089 n/c -8.6%
1,145 1,145 n/c 5.2%
1,166 1,045 -10.4% -8.8%
1,345 1,349 0.3% 29.2%
1,411 1,459 3.4% 8.1%
83 83 n/c -9.0%
88 88 n/c 5.3%
89 79 -11.5% -10.3%
102 101 -1.4% 27.8%
107 109 1.6% 7.9%
68 68 n/c -22.7%
73 73 n/c 7.4%
75 67 -9.8% -7.7%
79 78 -1.3% 15.3%
82 84 1.6% 7.8%
SOURCES: MORGANS ESTIMATES
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Insurance - Composite│Australia│Equity research│February 15, 2018
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