In today’s daily we have covered stock research on SUNCORP(EXPENSIVE).









 
The S&P 500 was down by 8.77 points or 0.41%on Monday and closed at 2108.92 points.  U.S. stocks ended down on Monday, led by losses in the healthcare sector and biotech shares after disappointing news from several companies including Amgen. Monday’s pullback in the Nasdaq snapped a five-day winning streak for the index. The S&P and Nasdaq both closed at records Friday, marking the sixth for the S&P and the second for the Nasdaq this year. The Dow on Friday ended 1.1% below its record close.

Gains in DuPont Co. and Apple Inc. helped keep the Dow near the flatline. Apple shares rose 1.2%. The tech company reports earnings after the bell. European stocks rose after Greece reshuffled its team for bailout negotiations. France’s CAC 40 gained 1.3% and Germany’s DAX rallied 1.9%. Time is running out for Greece and its creditors to reach a new bailout deal, with the loans Greece owes to the International Monetary Fund due in early May.



APPLE Daily Chart (Source - Thomson Reuters)
 
S&P ASX 200was up by 49.40points or 0.83%on Monday and closed at 5982.70 points. Resources giant BHP Billiton added 1.6 per cent to $32.57, while main rival Rio Tinto rose 3.4 per cent to $59.77. Australia's biggest standalone oil producer Woodside Petroleum added 1.4 per cent to $35.89. Santos lifted 4.4 per cent to $8.35. Junior telecommunications provider iiNet was a standout soaring 13.2 per cent to an all-time high $9.80 after M2 Group lobbed a $1.6 billion scrip offer, besting an earlier $1.4 billion cash offer from rival TPG Telecom. 

Shares in M2 Group lost 5.4 per cent to $10.90, while TPG Telecom shed 6.2 per cent to $9.01.  Telstra Corporation, Australia's biggest telco, posted a positive session, up 1.1 per cent at $6.39. Suncorp lost 1.3 per cent to $13.62, while IAG dropped 1.3 per cent to $5.90. ANZ Banking Group slipped 0.4 per cent to $35.58, while the rest of the big four banks advanced. Westpac Banking Corporation rose 1.1 per cent to $38.85, National Australia Bank gained 1 per cent to $38.45, and Commonwealth Bank of Australia added 0.7 per cent to $92.72. In retail Woolworths added 1.1 per cent to $29.23, while Wesfarmers, owner of Coles, lifted 1.3 per cent to $43.17



IINET Daily Chart (Source - Thomson Reuters)



 
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Suncorp Video



 
Stock Of The Day - Suncorp (Expensive)

Suncorp Group (SUN) reported to have responded to more than 7500 claims related to NSW storms and associated flooding. The Company has deployed its customer response teams to help customers process the claims along with some 100 contact centre representatives to manage customer calls. SUN could not provide an accurate estimate of claims costs but reported to have comprehensive reinsurance program to protect against financial impact of natural hazard events. Therefore, we understand that uncertainty prevails in FY15 earnings based on weather claims. Overall, 2H FY15 started off with total claims costs from Cyclone Maria to be $404 million as at 12 March 2015 with an indication of SUN failing to meet the full-year return on equity (ROE) guidance of 10% following the cyclone and flooding.


Diversification of Earnings (Source – Company Reports)

The Company is having a lower excess capital of $627m at the end of 1H15 (as compared to $831m at the end of June 2014) which can also be windswept soon with the growth in lending book at a higher rate than the system growth. The divestment of the banking and life insurance businesses in view of lower capacity to return excess capital and shoddier ROE relative to the general insurance business may be explored as an option. The intangibles are about 28% of total assets (predominantly Promina goodwill) and require a higher amount of regulatory capital straining the ROE. Expansion of ROE looks to be tough without efforts such as divestment of low ROE operations, in-house synergies etc. Then the reinsurance dispute may also amount to about $59m (after-tax) charge.

Particularly, earnings growth prospects look hazy given general insurance trading result (ITR) margins likely to affect profit growth in the Bank and Life insurance. For instance, an EPS CAGR of 2% to FY18 may lead to a 200bps contraction from 15% to 13% by FY17 in general insurance underlying ITR margins. However, the Company believes to have enough cost counterbalances to protect margins from lowering premium rates and bond yields. Weakness is expected to prevail in premium rates in FY16 with Personal Lines and Commercial Lines pricing to stay below inflation levels.

Given the above, market at the same time believes that SUN may be able to manage earnings through support from one or more of a reinsurance cover entailing about $100m to about $200mn of earnings protection, a cost-to-income ratio of about 50% resulting in about 5% growth in EPS, and EPS growth from Life earnings. Thus we do see pressure while looking at the competitor, Insurance Australia Group, which is reportedly having a reinsurance protection of $150 million over $700 million allowance set aside for natural disasters in FY15, and the same is likely to help without any change indicated for margin guidance.



HY15 CET1 Movements (Source – Company Reports)

The incoming CEO, Michael Cameron, is expected to make efforts towards continuation of the Company’s capital management plans. There are however few speculations over the lack of operational experience in general insurance that Mr Cameron carries as a baggage. Thus a growth-linked focus should be at large the strategy to be displayed as the Company is witnessing softness in the general insurance market.


General Insurance (Source – Company Reports)

We do note that during the second fiscal quarter of 2015, the Company achieved sales totaling $8.46 billion, which indicates a 2.5% rise from the $8.25 billion in sales during the second quarter of 2014. SUN also expects to complete the work of capital diversification in 1H16 to help reconsideration of excess Common Equity Tier 1 (CET1).


Suncorp Daily Chart (Source - Thomson Reuters)

However, the headwinds seem to be little strong with the consensus expectations of about waning dividends over the next three years required to be watched over. The Company performance has been poor in last few months in insurance sector. One also needs to consider risks such as operational risks, increase in bad debts, high level of competition generating pressure on top-line growth, and natural calamities. SUN may be able to shed some light on performance and growth during its 2015 Suncorp Group Investor Day scheduled for May 2015.

Based on the foregoing, we still believe that the stock is expensive at the current price of $13.62.
 

Level 13  167 Macquarie Street
Sydney NSW 2000 Australia
E-Mail - [email protected]
Phone - 02 8667 3147


        
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