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Suncorp Group LIMITED

Mar 07, 2016

SUN:ASX
Investment Type
Mid - Cap
Risk Level
Action
Rec. Price ($)

Company Overview - Suncorp Group Limited is engaged in the provision of general insurance, banking, life insurance, superannuation products and related services to the retail, corporate and commercial sectors in Australia and New Zealand. The Company's segments include Personal Insurance, Commercial Insurance, General Insurance New Zealand, Banking and Life. Personal Insurance segment offers home and contents insurance, motor insurance, boat insurance and travel insurance. Commercial Insurance segment offers commercial property insurance, marine insurance and workers compensation insurance. General Insurance New Zealand segment offers business insurance, construction and engineering insurance, and public liability and professional indemnity. Banking segment offers personal and commercial banking, agribusiness, property and equipment finance, home, personal and small business loans. Life segment offers life insurance products, superannuation administration services and funds administration services.


SUN Dividend Details
 
Launched a new operating model to enhance customer value: Suncorp Group Ltd (ASX: SUN) recently reported a new operating model to enhance its customer experience to position itself for future growth prospects and this is in alignment with SUN’s strategy of ‘one company many brands’. Suncorp Group intends to enhance its offerings in Banking, Wealth and Insurance throughout its core Australia and New Zealand business. Accordingly, its new operating model would develop a customer-focused function supported by leaner shared services. SUN intends to have three operational business segments which includes Insurance Australia, Banking & Wealth, and Insurance New Zealand, wherein each segment would involve with claims management, product design and manufacturing, enhanced experience delivery as well as end-to-end statutory entities duty. SUN is already on track of generating good customer outcomes and has even received the Bank of the Year award by Money magazine driven by its better Personal Insurance retention. The group’s Commercial Insurance business is among the preferred partner by brokers, while its Direct Life Insurance online offer also got top rankings. Suncorp wants to expand its relationship with current customers as connected customers would be able to deliver six times better retention and would be able to generate seven times more valuable and 2.5 times higher activity as per the management estimates.
 

Suncorp’s customer platform outcome (Source: Company Reports)
 
Delivered a solid bank business performance: Suncorp Group’s Bank profit rose by 10% on a year-on-year (yoy) basis to $194 million during first half of 2016 driven by the decreased impairment losses, indicating the group’s solid loan portfolio quality as well as contribution from its Advanced Accreditation tools. Despite incurring impairment losses of around 4 basis points, the division’s operating range is as expected as its risk management investments like the Advanced Accreditation programs were paid off during the period. Management estimates to maintain its credit quality metrics. Net interest income for the bank division rose by 2.4% while Net Interest Margin reached 1.85% during the six months period on the back of repricing across the market despite the rising funding costs and competition. Lending portfolio rose by 5.1% during the first half of 2016 against prior corresponding period (pcp) as the group’s home segment’s marketing efforts paid off. Suncorp has diversified its lending portfolio wherein over 60% of new business is not from Queensland. But Non-Housing lending witnessed a slight decrease as Agri customers were able to pay off their debt given the positive operating conditions. However, Suncorp Bank’s cost to income ratio increased to 53% which is better than its target range of 50% driven by the Project Ignite completion. Management reported that the Ignite project is on track to be totally implemented by end of fiscal year of 2016, while final customer migrations and decommissioning would be implemented by the first half of fiscal year of 2017.
 

Suncorp Group’s Bank profit performance in the first half of 2016 (Source: Company Reports)
 
Ongoing General Insurance pressure: Suncorp’s General Insurance net profit after tax fell by 29% to $297 million in the first half of 2016 as compared to $631 million in the pcp impacted by the natural hazards and investment market volatility effect. The group incurred natural hazard costs of $362 million during the period which is $28 million above the allowance. But the overall investment income delivered an annualized return of over 2.2% to $133 million during the period. SUN generated an ITR of 9.4% in the half year ended at December 2015 while post the natural hazards impact, the underlying ITR reached 10.1%. Meanwhile, the group’s Personal Insurance Gross Written Premium (GWP) reported a rise by over 0.6% only during the period despite better average premiums which were offset by corporate partners exit. Commercial Insurance GWP rose by 2.2% during the period even through there was solid rise across the compulsory third party (CTP) portfolio, due to the Western Australian Workers Compensation portfolio negative impact. Accordingly, management intends to revamp its performance by decreasing working claims costs, coupled with other initiatives, leading to a better underlying ITR for the fiscal year of 2016. With regards to the group’s Life segment performance, the net profit after tax for this division was also under pressure during the period which plunged by 39% yoy to $53 million on the back of investment market volatility impact where the actual returns were less as compared to the group’s longer-term forecasts. However, the Life segment’s underlying profit rose by over 10% to $58 million during the first half of 2016 as the segment was stabilized during the year on the back of revisions of major assumptions during 2014. As a result, the overall claims and lapse performance delivered over $8 million. The segment’s overall in-force annual premiums rose by 5.2% as the group has been enhancing its retention and value over volume, to develop a sustainable potential new business for the segment.
 

General insurance performance pressure for the first half of 2016 (Source: Company Reports)
 
Better capital position: Suncorp reported a fully franked interim dividend of 30 cents per share leading to a dividend payout ratio of 69% in the first half of 2016. Post the dividend payments, Suncorp would have over $506 million of capital which is better than its mid-point of its estimated target range. Still, the group was able to report a CET1 capital of $506 million which is better than its operating targets, while the General Insurance CET1 is 1.25 times PCA and the Bank CET1 reached 9.45% during the first half of 2016. Suncorp reported over $156 million of franking credits post the interim dividends payments. The group was also able to deliver a better Common Equity Tier 1 ratio and has over $243 million of capital held at the NOHC level.
 

Suncorp’s capital position as compared to its peers (Source: Company Reports)
 
Stock Performance: The shares of Suncorp group declined by 12.2% (as of March 04, 2016) in the last three months impacted by its ongoing general insurance pressure on the back of natural events hazard impacts coupled with the current challenging market conditions. Moreover, the group’s net profit after tax (NPAT) fell to $530 million for half year ended at December 2015 as compared to $631 million in pcp while its profit after tax plunged to $544 million against the $681 million in the first half of 2015. On the other hand, Suncorp undertook strong initiatives to generate a decent medium to long term growth prospects. Accordingly, the group recently launched a new operating model to strengthen its current as well as new customer relationships. SUN is also targeting to deliver a better underlying NPAT growth for the fiscal year of 2016. Consequently, the group forecasts to generate a strong return on equity of at least 10% indicating an underlying ITR of at least 12% for fiscal year of 2016. SUN intends to achieve dividend payout in the range of 60% to 80% of cash earnings as well as maintain its competitive capital position. Management reported that they are streamlining their business to deliver better efficiency and targeting optimization benefits of over $170 million by 2018 which would be passed on to shareholders as well as for reinvestment opportunities. SUN stock recovered over 5.2% (as of March 04, 2016) in the last five days and we believe that the stock would be able to rise in the coming months. Moreover, SUN is trading at very attractive valuations with a lower P/E and has a decent dividend yield. Based on the foregoing, we remain bullish on the stock and reiterate our “BUY” recommendation at the current price of  $11.71
 
 
SUN Daily Chart (Source: Thomson Reuters)



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