May 1, 2018 - Sunshine Coast ... publications please contact your local Morgans branch or write to GPO Box 202 Brisbane
Insurance - Composite│Australia│Equity research│May 1, 2018
Suncorp Group Quarterly update
ADD (no change) Current price: Target price: Previous target: Up/downside: Reuters: Bloomberg: Market cap:
A$13.92 A$14.65 A$14.31 5.2% SUN.AX SUN AU US$13,634m A$18,075m US$39.07m A$50.25m 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
15
Vol m
10
■ SUN has re-iterated its FY19 financial targets as part of an investor presentation. ■ SUN’s quarterly APS 330 banking update was also stable. Impairment losses of 1bps to GLA’s for the quarter remain low, although loan growth has slowed from 1H18 levels.
■ We make nominal changes to our SUN FY18/FY19 EPS forecasts of -1%/+1%. Our valuation (A$14.65) rises ~2.5% on a valuation roll-forward.
■ We see upside from here if management can achieve FY19 group targets. ADD recommendation maintained.
Re-affirming FY19 guidance metrics SUN has released an investor presentation in conjunction with its quarterly APS 330 banking update. At the headline level, the key presentation takeaway was reiteration of SUN’s FY19 financial targets provided at the FY18 result, e.g. a group expense base of A$2.9bn, a group insurance margin (ITR) of at least 12%, etc. The presentation by SUN’s Banking and Wealth CEO, David Carter, also noted that banking system credit growth was seeing rising headwinds from mortgage repricing and a lift in funding costs. The recent rise in the BBSW expected to mean SUN’s FY18 bank net interest margin will be at the middle of managements target range (1.80% to 1.90%).
5 May-17
Aug-17
Nov-17
Quarterly banking update
Feb-18
Source: Bloomberg
Price performance Absolute (%) Relative (%)
1M 4.3 -0.1
Richard COLES T (61) 2 9043 7911 E
[email protected]
3M 0.3 1.5
12M -0.7 -1.7
Overall we saw SUN’s quarterly banking update as pretty stable. Credit quality remains excellent with bad debts to gross loans and advances (GLA’s) of just 1bps (annualised) in 3Q18. Gross impaired assets of A$140m were also broadly flat on 2Q18 although past due loans (A$453m) did rise A$42m reflecting seasonality in retail arrears and several mid-to-large commercial customers moving past due. Slowing loan growth was the weakness in the quarterly performance, with 3Q18 loan growth of ~1% comparing to 4.7% growth achieved in 1H18. Management noted the loan market is becoming more competitive, although SUN’s growth rates in both lending and deposits are still above system this financial year.
Earnings changes We make nominal changes to our SUN FY18/FY19 EPS forecasts of -1%/+1%. Earnings changes reflect mainly a slight lowering of bank loan growth assumptions, offset by reduced impairment charges. Our valuation (A$14.65) rises ~2.5% on a valuation roll-forward.
Investment view We think 1H18 was the low point for SUN’s ITR and we see a clear pathway for the ITR to rise above managements 12% target level by FY19. We also expect SUN to produce a solid 2H18 group result assisted by strong reinsurance protections. SUN still remains at a substantial 4 PE point discount to IAG in FY19, and we expect this gap to close if management can deliver on stated FY19 management targets.
Financial Summary Gross Written Premium Net Premium (A$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% 16.7 68.0 4.9% 1.3 8.1%
Jun-17A 8,111 7,072 1,145 88 5.3% 15.9 73.0 5.2% 1.3 8.4%
Jun-18E 8,288 7,541 1,047 79 -10.1% 17.6 67.5 4.9% 1.3 7.6%
Jun-19E 8,620 7,779 1,333 99 26.0% 14.0 76.7 5.5% 1.3 9.5%
Jun-20E 8,878 8,012 1,429 106 7.0% 13.1 82.1 5.9% 1.2 10.0%
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│May 1, 2018
Figure 1: SUN - Financial summary A S X c o de :
S UN S ha re pric e ( A $ ) :
13 .9 2
P ro f it & lo s s ( A $ m )
No . o f skares (m): M arket cap (A $ m):
1,278 Reco mmendatio n: 17,784 Valuatio n:
A DD $ 14.65
G e ne ra l Ins ura nc e Gro ss Written premium
7,803
8,111
8,288
8,620
P rice target:
$ 14.65
Net earned premium
6,893
7,072
7,541
7,779
8,012
Upside/(do wnside): FY18F P E Ke y f ina nc ia ls
(4,923)
(5,445)
(5,598)
(5,892)
15.9
Operating expenses
F Y 19 F
F Y20F
1,038
1,075
1,006
1,294
1,394
gro wth (%)
-8.4
3.6
-6.4
28.6
CA SH NP A T
1,089
1,145
1,047
1,333
gro wth (%)
-8.6
5.2
-8.6
27.2
gro wth (%) Cash EP S - pre NRI & A dj. (A cps) gro wth (%)
-8.5
82.6 3.8
83.3
-8.2
87.8
78.9 -10.1
27.3 99.4 26.0
1,429 7.2 103.7 7.5
(1,442)
(1,561)
(1,416)
(1,379)
236
205
202
181
257
Insurance Trading Result
619
912
738
945
998
71
65
97
73
105
690
977
835
1,018
1,103
Inco me tax
(200)
(288)
(239)
(292)
(316)
G e ne ra l ins ura nc e pro f it a f t e r t a x
490
689
596
727
787
68
34
55
55
60
558
723
651
781
848
1,340
Other inco me 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
106.4 7.0
B a nk ing & We a lt h
68.0
73.0
67.5
76.7
82.1
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
96.5
7.7
(1,411)
Investment inco me - insurance funds
DP S (c)
Tax rate (%)
-9.0
75.8
8,878
(5,099)
F Y 18 F
79.6
F Y 19 F F Y 2 0 F
Net incurred claims
F Y 17 A
EP S - Repo rted
F Y 18 F
5.2%
F Y 16 A
Repo rted NP A T (A $ m)
F Y 16 A F Y 17 A
1,129
1,131
1,205
1,268
88
76
68
71
76
(639)
(636)
(686)
(681)
(713)
P ro fit befo re impairment lo sses o n lo ans and advances 578
571
587
658
703
Impairment lo sses o n lo ans and advances
(7)
(20)
(35)
(55)
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
567
623
648
P rice/earnings ratio (x)
17.5
16.9
18.4
14.4
13.4
Inco me tax
(169)
(168)
(170)
(187)
(194)
Cash P /E
B a nk pro f it a f t e r t a x
393
396
398
436
454
25
4
12
12
12
4 18
400
4 10
448
466
N e w Z e a la nd Gro ss Written premium
16.7
15.9
17.6
14.0
13.1
P rice/bo o k value (x)
1.3
1.3
1.3
1.3
1.2
We a lt h pro f it a f t e r t a x
P rice/NTA (x)
2.3
2.2
2.2
2.1
2.1
B a nk ing & We a lt h pro f it a f t e r t a x
Dividend yield (%)
4.9
5.2
4.9
5.5
5.9
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
9.2
9.7
Net incurred claims
(562)
(693)
(631)
(707)
(763)
Cash ROE (%)
8.1
8.4
7.6
9.5
10.0
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
72.0
73.5
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
90.2
90.7
Other pro fit (lo ss) befo re tax
GI Insurance margin (%)
9.0
12.9
9.8
12.2
12.5
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 2
1,3 9 9
1,4 9 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 7
1,3 3 3
1,4 2 9
(51)
(70)
(41)
(39)
(35)
1,0 3 8
1,0 7 5
1,0 0 6
1,2 9 4
1,3 9 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
9.1
9.2
9.3
13.5
14.6
13.6
13.5
13.5
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
138
276
480
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 .5
12 .8
Underlying ITR (%)
10.6
11.5
10.7
11.8
12.4
4.8
4.8
5.3
5.1
5.2
F Y 16 A F Y 17 A 4.5 1.9
F Y 18 F 6.6
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 (%)
F Y 19 F F Y 2 0 F 6.5 6.3
M e t ho do lo gy:
SOT P s
Interest M argin (%)
1.86
1.83
1.86
1.84
1.83
S um o f pa rt s v a lua t io n
Co st To Inco me Ratio (%)
52.5
52.7
53.9
50.9
50.4
Co re B ank (P E multiple)
5,148
$ 4.01
12.0
B DD/A verage Gro ss Lo ans (%)
0.03
0.01
0.03
0.06
0.08
General Insurance (P E)
12,215
$ 9.51
12.0
1,455
$ 1.13
15.0
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
2.9
F Y 18 F (2,879) 4.9
F Y 19 F F Y 2 0 F (2,703) (2,689) (6.1)
(0.5)
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
18 ,8 18 $ 14 .6 5 0.0% $ 14 .6 5
SOURCE: MORGANS ESTIMATES
2
Insurance - Composite│Australia│Equity research│May 1, 2018
Earnings changes We make nominal changes to our SUN FY18/FY19 EPS forecasts of -1%/+1%. Earnings changes reflect mainly a slight lowering of bank loan growth assumptions, offset by reduced impairment charges. Our valuation (A$14.65) rises ~2.5% on a valuation roll-forward. Downside risks to our ADD call are; 1) 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%
1,200 1,202 0.2% -0.2%
1,415 1,399 -1.2% 16.3%
1,525 1,495 -2.0% 6.9%
1,089 1,089 n/c -8.6%
1,145 1,145 n/c 5.2%
1,045 1,047 0.3% -8.6%
1,349 1,333 -1.2% 27.2%
1,459 1,429 -2.1% 7.2%
83 83 n/c -9.0%
88 88 n/c 5.3%
79 79 0.2% -10.1%
101 99 -1.2% 26.0%
109 106 -2.0% 7.0%
68 68 n/c -22.7%
73 73 n/c 7.4%
67 68 0.2% -7.5%
78 77 -1.2% 13.6%
84 82 -2.0% 7.0%
SOURCES: MORGANS ESTIMATES
3
Insurance - Composite│Australia│Equity research│May 1, 2018
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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. Those acting upon such information without advice do so entirely at their own risk. This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.
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