Suncorp Group Limited

SUN Details

Agreement for Sale of Australian Wealth Business: Suncorp Group Limited (ASX: SUN) provides banking, insurance, wealth, and other financial services to its clients. The market capitalisation of the company as on 28 April 2021 stood at ~$13.35 billion. As per a recent update, the company has announced that it has entered into an agreement for the sale of its Australian Wealth Business, Suncorp Portfolio Services Limited (SPSL), to LGIAsuper. The management believes that the agreement augurs well for SUN’s 137,000 superannuation members, and would simplify the Suncorp Group portfolio.

Proceedings Against SUN: On 15 April 2021, the company confirmed that it has received a representative proceeding filed in the Victorian Supreme Court, against its subsidiary AAI Limited. This is regarding the sale of add-on insurance through MTA Insurance. Suncorp intends to defend this class action.

Update on Natural Hazard: As of 30 March 2021, the company has received over 7,600 claims across New South Wales, South East Queensland, and Victoria. It expects the claim numbers to rise, and estimates net claims costs to be around $230-$250 million in relation to the event. As per the company, the costs will be capped at $250 million under the Group’s main catastrophe program.

H1FY21 Performance Update: During the period, the company reported 39.5% increase in the cash profit to ~$509 million, driven by higher earnings across all businesses. The Group NPAT stood at $490 million during the period. It maintained a decent liquidity position with common equity tier 1 capital (CET1) of $1,026 million. It declared an interim dividend of 26 cents per share in H1FY21.

H1FY21 Financial Performance (Source: Company Reports)

Key Risks: The company’s line of business exposes it to the vagaries of nature, and is prone to natural hazards risk and excessive claims in the process.

Outlook: The company expects that there will be approximately $14 million (pre-tax) of annualised stranded costs as a result of the sales of its Australian Wealth business. However, the costs are expected to be offset by transitional service fees during FY22 and FY23 and will be removed from the Group's cost base by the end of FY23.

Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: As per ASX, the stock of SUN is trading above its average 52-weeks’ levels of $8.090-$11.110. The stock of SUN gave a positive return of ~24.28% in the past six months and a positive return of ~6.17% in the past one month. On a technical analysis front, the stock of SUN has a support level of ~$10.103 and a resistance level of ~$10.772. We have valued the stock using a P/BV multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount to its peer average P/BV (NTM Trading multiple), considering the impact of the claims due to natural hazard in Australia and court proceedings. For the purpose, we have taken peers such as Insurance Australia Group Limited (ASX: IAG), QBE Insurance Group Limited (ASX: QBE), Tower Limited (ASX: TWR), to name a few. Considering the valuation and current trading levels, decent financial performance and agreement for sale of the Australian Wealth Business, we recommend a ‘Hold’ rating on the stock at the current market price of $10.490, up by 0.768% as on April 28, 2021.

SUN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Steadfast Group Limited

SDF Details

Uplift in Guidance Performance: Steadfast Group Limited (ASX: SDF) is engaged in the business of insurance broking and underwriting services. The market capitalisation of the company as on 28 April 2021 stood at ~$3.55 billion. The company recently announced the results for nine months ending on 31 March 2021 and has reported impressive performance. Revenue grew by 7.2% and there was a growth of 20.5% in underlying EBITDA. Hence, based on the improved financials, it has uplifted its FY21 guidance range, with underlying EBITDA expected to be between $259-$266 million.

FY21 Guidance Uplift (Source: Company Reports)

Key Risks: The Group is faced with the risk of compliance in regard to the failure to act in accordance with laws, regulations and industry practices.

Outlook: Despite the uncertainty in the economic environment, the trading conditions experienced in H1FY21 demonstrated the strong underlying business of the Group. In view of the improved financial performance in H1FY21, the company declared a dividend of 4.4 cents per share during the period.

Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: As per a recent update, the company has announced that it has increased its shareholding in unisonSteadfast to a majority stake of 60%. As per ASX, the stock of SDF is trading towards the upper band of its 52-weeks’ levels of $2.695-$4.220. The stock of SDF gave a positive return of ~16.57% in the past six months and a positive return of ~8.07% in the past one month. On a technical analysis front, the stock of SDF has a support level of ~$3.856 and a resistance level of ~$4.203. We have valued the stock using a P/BV multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at some premium to its peer average P/BV (NTM Trading multiple), considering the decent financial performance and optimistic guidance performance. For the purpose, we have taken peers such as AUB Group Limited (ASX: AUB), Insurance Australia Group Limited (ASX: IAG), NIB Holdings Limited (ASX: NHF), to name a few. Considering the expected upside in valuation and current trading levels, impressive financial performance, an increase in the shareholding in unisonSteadfast and uplift in guidance performance in FY21, we recommend a ‘Hold’ rating on the stock at the current market price of $4.150, up by 1.715% as on April 28, 2021.

SDF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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