Stocks’ Details

Suncorp Group Limited

FY20 Results Highlights: Suncorp Group Limited (ASX: SUN) is a financial services company that offers insurance, banking and wealth products and services throughout Australia and New Zealand. For the year ended 30 June 2020, the company reported a net profit after tax of $913 million, which included the $285 million profit after tax from the sale of Capital S.M.A.R.T and ACM Parts. Further, the company reported cash earnings of $749 million, down by 32.8% on the previous year, impacted by one-off expenses, and provisioning for COVID-19 impacts. Despite facing the challenges from the ongoing COVID-19 pandemic, the company was able to maintain its financial flexibility throughout the period, which allowed it to declare a decent final dividend of 10 cents per share, representing 61% of cash earnings. Notably, the company retains a robust balance sheet with an excess Common Equity Tier 1 capital of $823 million.

FY20 Results (Source: Company Reported)

Focus Areas: The company is currently emphasizing on implementing its new operating model, which is focused on improving the performance of its core insurance and banking businesses, and execution of its digital transformation. Further, the company is simplifying its structure to fasten the decision-making process and improve productivity. In a recently released Chairman’s letter to shareholders, the company informed that it is going to hold its Annual General Meeting (AGM) on 22 October 2020.

Key Risks: The company is exposed to the risks and uncertainties caused by the COVID-19 pandemic as it has affected investment markets and the economic environment globally, including Australia and New Zealand. Further, the company is exposed to the risks related to the changes in the customers’ changed behavior and new expectations, and competitors introducing new business models that better meet customer needs.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM - Next Twelve Months

Stock Recommendation: The stock of SUN has corrected by 18.29% in the last six months and is inclined towards its 52-weeks low price, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$8.5 and a resistance level of ~$9.6. We have valued the stock using the Price to Cash Flow multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the company’s decent balance sheet with excess capital, its new focus areas, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $9.160, up by 0.992% on 7 September 2020.

Virgin Money UK PLC

Tender Offer Update: Virgin Money UK PLC (ASX: VUK) is a financial services company that offers savings, mortgages, credit cards, current accounts, currency services, pensions, investments and protection products to customers across the UK. The company recently launched an invitation to holders of its £475 million 5% Fixed Rate Reset Callable Subordinated Tier 2 Notes due 2026, to tender such Notes for purchase by the Issuer for cash up to £475 million. It is expected that the offer will provide liquidity to investors. The offer is going to end on 8 September 2020 with settlement expected on 11 September 2020.

Q3 FY20 Highlights: For Q3 FY20 or June 2020 quarter, the company reported customer deposits of £67.7 billion, up 4.8% on the previous quarter, reflecting lower personal customer spending during lockdown and business customers maintaining higher levels of liquidity. Over the quarter, business lending grew by 5.7% to £8.8 billion, underpinned by significant demand for the Government-backed lending schemes. Further, the company’s CET1 ratio increased by around 30bps to 13.3% due to net reductions in RWAs. Due to low activity in the new purchase market given the impacts of lockdown, the company’s mortgage balances reduced by 1.0% in Q3 FY20. Notably, the company has not witnessed any significant credit losses in relation to the pandemic impact.

Q3 Results Highlights (Source: Company Reports)

Outlook: With a CET1 ratio of 13.3% as at 30 June 2020, the company seems to be well placed in an uncertain outlook. It is expected that the current EBA consultation on the treatment of software intangibles will further increase the company’s CET1 capital. The company has re-started PPI processing activities and is currently building capacity back towards pre-covid levels. In recent weeks, the UK economy has witnessed increased consumer spending and economic activity, reflecting that the economy is recovering. The company is expected to release its FY20 results on 24 November 2020.

Stock Recommendation: The stock of VUK has corrected by 43.04% in the last six months and is inclined towards its 52-week low of $1.060, offering a decent opportunity for accumulation. On the technical analysis front, the stock has an immediate support level of ~$1.547 and a resistance level of ~$2.19. On a TTM basis, the stock has a price to book value multiple of 0.3x, lower than the industry average (banking) of 2.8x, demonstrating that the stock might be undervalued at the current juncture. The company currently has a decent total Capital and UK Leverage ratios of 19.1% and 4.9% respectively, and a prudent liquidity position with LCR of 148%. Considering the emerging UK economy, the company’s resilient performance in June quarter, growth in business lending, the company’s decent CET1 capital, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.695, up by 6.27% on 7 September 2020.

IOOF Holdings Limited

MLC Acquisition: IOOF Holdings Limited (ASX: IFL) is engaged in providing financial advice and distribution, along with portfolio and estate administration, and investment management solutions. The company recently entered into transaction agreements with National Australia Bank (NAB) to acquire 100% of NAB’s wealth management business (MLC) for $1,440 million. The acquisition is expected to deliver in excess of 20% EPS accretion on an FY21F pro forma basis and will create long-term value for the benefit of IFL’s clients, members and shareholders. The acquisition is expected to be complete before 30 June 2021, subject primarily to required regulatory approvals.

Capital Raising Initiatives: In order to fund the MLC acquisition and gain additional financial flexibility, the company has recently announced an Entitlement Offer, Placement and Share Purchase Plan (SPP), on 2^nd September 2020. From the Institutional Entitlement Offer, the company raised around $282 million, and from the Placement, it raised around $452 million. It is expected that the settlement of the new Shares issued as part of the Institutional Entitlement Offer and Placement will occur on 7 September 2020. On 7 September 2020, the company announced that it has opened its Retail Entitlement Offer and SPP. Under the SPP, eligible IOOF shareholders are allowed to apply for up to A$30,000 of new fully paid ordinary shares (New Shares) without incurring brokerage or other transaction costs.

SPP Dates (Source: Company Reports)

FY20 Result Highlights: For the year ended 30 June 2020, the company reported statutory NPAT of $147 million and funds under management, advice and administration (FUMA) of $202.3 billion. During FY20, the company received net proceeds of $105 million from divestments of non-core subsidiaries. Over the year, the company’s gross margin increased by 16.3% to $577.6 million. The company recently declared a fully franked dividend of 11.5 cents per share.

FY20 Results Highlights (Source: Company Reports)

Key Risks: The company is exposed to the risks of stiff competition as it operates in a market where there are a variety of participants which are competing for investments from clients and for the provision of wealth management services. The company is also exposed to the risks related to acquisitions as it could have a material effect on IOOF’s financial position.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of IFL has corrected by 30.27% in the past six months and is inclined towards its 52-weeks low of $2.505, offering investors a decent opportunity for accumulation. On the technical analysis front, the stock has an immediate support level of ~$3.11 and a resistance level of ~$4.136. We have valued the stock using the price to earnings multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the anticipated benefits from the company’s ongoing MLC acquisition, recent capital raising activities, decent FY20 performance, and current trading levels, we suggest a “Buy” recommendation on the stock at the current market price of $3.420, down by 4.735% on 7 September 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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