Suncorp Group Limited

Operating Performance Remains Intact in FY19:Suncorp Group Limited (ASX: SUN) is engaged in the provisioning of insurance,banking and wealth products and services to the retail, corporate and commercial customers in Australia and New Zealand.

FY19 Financial Highlights:The company reported its full year results for FY19 wherein net profit after tax stood at $175 million as compared to profit of $1059 in FY18. The bottom-line was affected by sale of life business at a loss of $910 million during FY19. Overall compulsory third party GWP (Gross Written Premium) decreased by $70 million, driven mainly by the scheme reform in NSW which became effective on 1 December 2017. The business benefitted from lower motor and home claims. During the period, cash earnings stood at $1,115 million, an increase of 1.5% y-o-y which included stranded costs of $13 million, following the sale of the Australian Life Insurance and Participating Wealth Business, and a provision of $60 million for remediation costs.


FY19 Financial Highlights (Source: Company Reports)

The board recommended a fully franked ordinary dividend of 44 cents for each ordinary share held, payable on 25 September 2019.

Segment Performance:Gross written premium from Australia segment during FY19 came in at $8,245 million, up 1.3% on y-o-y while profit from Australia segment was down by 13.7% y-o-y. Decline in profitability was attributed to higher natural hazard costs in the first half and weaker investment markets. However, continued benefits of the Business Improvement Program (BIP)and the realignment of the Commercial portfolio improved the underlying margins. The business reported a net claim of $5,136 million, marginally higher than $4,998 million in FY18.

New Zealand segment delivered a decent GWP growth of 10.1% on FY18 to $1,566 millionwhile PAT from New Zealand segment came in at $245 million, higher by 81.5% on FY18. Operating expenses were higher due to a rise seen in commissions rates. Operating expenses were higher by 12.1%, due to higher commissions. The Life Insurance business posted a profit after tax of $41 million, up $5 million on y-o-y. In-force premium growth was characterized by policy retention and premium growth.

PAT from Banking & Wealth stood at $364 million, marginally lower by 1.4%on prior corresponding year. The quarter saw challenging operating and economic conditions, accompanied with higher regulatory and compliance costs. NIM contracted to 1.79%, a decline of 5bps. Positive impacts from growth in at-call deposits were offset by the elevation of the bank bill swap rate for the majority of FY19 and an increase in mortgage discounting to retain customers. In the Investment portfolio, the underlying yield was down by 2.3%, during the first half and stood at the lower end of the company’s range above risk free.

Outlook:The management expects the business growth across New Zealand to stabilize in FY20 and the working claims to return to normal levels. Investment revenue on the Insurance funds are likely to be lower, aided by lower yield from bond portfolio. As per the Management guidance, FY20 net benefit is targeted at $380 million. Further, the company will focus to improve the performance of core businesses, leverage digital investments and data capability and further improve overall operational efficiency.

Stock Recommendation: The stock of SUN is trading at $13.680 with a market capitalization of $17.63 billion. The 52-week trading range of the stock is $12.050 to $15.400. It has delivered positive returns of 3.03% and 10.33% in last one month and YTD basis, respectively. The dividend yield of the stock stood at 5.15% compared to 3.8% of industry median. The stock is available at a P/BV multiple of 1.3x on TTM basis against the industry median of 1.4X. The operating segments of the company performed well in FY19. The company has remained focused on improving operational efficiency, aided by positive business outlook. Based on the aforesaid factors and valuation, we recommend a “Hold” rating on the stock at the current market price of $13.680, up 0.736% as on 05 September 2019.

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