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Suncorp Video



 

Stock Of the Day  - Suncorp (Expensive)

Suncorp’s (SUN) financial results for the half year ended 31 December 2014 indicated a better than expected net profit after tax (NPAT) of $631 million illustrating an increase of 15.1% over HY14; and profit after tax from business lines of $681 million indicating a rise of 14.1% over HY14. The interim dividend of 38 cents per share fully franked is slightly more than that of HY14 of 35 cents. The return on equity rose to 9.4% in comparison to 7.9% of HY14. The New Zealand operations contributed to around $95 million. The operating expenses shot up by less than 1% to $1,366 million.



HY15 Result Overview ($m) (Source – Company Reports)

In terms of divisional results, general insurance NPAT of $419 million was also slightly above that of HY14. There was a 0.3% reduction in gross written premium (GWP) excluding fire service levies (FSL) to $4,288 million. Reserve releases were reported to be of the order of $214 million owing to claims management and a benign inflationary environment and were $155 million above expectation of 1.5% of Net Earned Premium (NEP). With regards to bank division, SUN reported the NPAT to be of the order of $176 million in comparison to $105 million of HY14. An increase to 1.86% was noted for bank Net Interest Margin (NIM) from that of HY14. However, gross Non-Performing Loans were down 15%. Life NPAT of $86 million as opposed to $22 million of HY14 with positive claims and lapse experience was noted.


Bank Lending Portfolio (Source – Company Reports)

Going by the above, pressure in terms of GWP and weakening of underlying margin is further expected. Nonetheless, we see that bank and life divisions have illustrated an improvement in results and both may yield earnings growth in the near term.



Top line Growth (Source – Company Reports)

Quite recently, SUN announced about the financial impact of Tropical Cyclone Marcia and associated flooding in Queensland that entail claims of about 10,000 across insurance brands including Suncorp, AAMI, Apia, GIO and Vero. Primarily, the claims relates to damaged homes in the Central Queensland towns of Rockhampton, Yeppoon, Biloela and Maryborough; and a cost between $120 million to $150 million (pre-tax), net of the 30% proportional quota share arrangement covering the Queensland home portfolio has been estimated. In view of the above, SUN expects the natural hazard expenses for the financial year to date to be in the range of $690 million to $720 million which is well above the Company’s yearly allowance of $595 million. SUN reported that the return on equity target of 10% for FY15 looks out of reach given the Brisbane Hailstorm in November 2014 and Tropical Cyclone Marcia in February 2015. These events are not expected to alter the stance for the margins in the near future in favor of SUN. The cyclical impact on commercial insurance along with shaky high margins in personal lines given market share losses in home and motor indicate a bearish outlook.


Suncorp Daily Chart (Source - Thomson Reuters)
 
The Company may still be able to pay a special dividend of 15cps in 2H15 in support from excess capital of about $627 million and franking credits of about $168 million. However and as per the Company’s outlook, condensed growth across the general insurance division with moderate lending growth in the Bank has been indicated that made SUN to bone down the target FY15 growth to a low single digit (from 4-6%).


Accordingly, we believe that the stock is EXPENSIVE at the current price of $13.33.