Suncorp Group Limited

Fat Prophets

Friday 30th October 2015

Fat Prophets’ Hot Stock – Suncorp (SUN.ASX)

Set for a lot more sun

What’s new?

Full year results from Suncorp Group revealed a robust operating and financial performance despite some headwinds on the claims front. Total revenue improved by 2.5 percent to $16,772 million, while net profit of $1,140 million was 55 percent above FY14. Encouragingly for investors, this year-on-year growth was achieved despite a number of adverse natural hazard events, which reduced earnings by $1,068 million. Offsetting the financial impact from natural catastrophes was the performance of the company’s Banking business, which increased its earnings by 55.3 per cent to $354 million.

The company is seeing the benefits of having dedicated significant capital and resources to the development of risk management capability, customer extensions and a new banking platform (Ignite). Advanced risk management has also underpinned quality growth and balance sheet strength. Total loans and advances increased by 3.9 percent, reaching $51.735 billion, of which housing loans saw the largest increase, growing $2.785 billion, with the retail deposit to loan ratio remaining healthy at 65.3 percent.

Post balance date, Suncorp announced that Group CEO, Patrick Snowball, will leave the Group, to be replaced by Michael Cameron, effective 1 October. We do not believe that executive management has been weakened by the change, with Mr Cameron having served as finance director at St George Bank and retail banking services group executive at Commonwealth Bank of Australia. In addition, the new CEO is an advocate for technology-driven advancement across all aspects of financial services, which we believe will help ensure that Suncorp continues its organic growth strategy.

Outlook

The outlook for Suncorp’s largest revenue stream, the General Insurance division, remains positive. Furthermore, while the company’s Personal Insurance business is experiencing solid profitable growth in both Australia and New Zealand, the Commercial Insurance business has maintained a robust position based on a diverse portfolio, commitment to underwriting discipline and market-leading claims performance.

Similarly, while the low growth and low yield economic outlook in Australia is likely to continue and increase competition in the mortgage market, we believe Suncorp’s healthy financial position, diversified funding base and strong risk management capabilities leave the banking division well placed to deliver targeted low-risk growth in such an environment. We also believe that the company’s strong positioning in the Queensland region will prove a big advantage, with the local economy likely to play some catch up with the rest of Australia on the back of a weakening Aussie dollar.

Bolstering the overall appeal of Suncorp is its yield, with the dividend expected to increase to 93.5 cents (6.3 percent growth) in FY16. While this forecast is predicated on Suncorp continuing to distribute 70 percent of total cash generated by the business, the company remains comfortable with funding its growth through its large cash reserves and debt on the back of a favourable liquidity position.

Price

From a fundamental standpoint, Suncorp remains modestly priced, with the company’s shares trading on an earnings multiple for FY16 of 12.9 times and offering a yield of 7.0 percent. This appears consistent with Suncorp’s technical outlook, with the company’s share price having continued to move within a trading range with support at $11.85 and resistance of $15.15. The recent break above the 50-day moving average is a positive development and a decisive break above resistance would bring a longer term target of $22.50 into play.

Worth buying?

A strong financial and operating performance in FY15 has not only demonstrated Suncorp’s earnings stability in variable market conditions, but also underscored the benefit of the Group operating under a conglomerate structure with a diversified earnings base.

Greg Smith is Head of Research at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE

Disclosure: Suncorp is held within the Fat Prophets Australian Share Income and Concentrated Australian Share Models.

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