Bets On as Goldman Sachs Gives A Buy On Suncorp

Suncorp Group Limited (ASX: SUN) makes a rebound on the stock exchange after market rallied on the positive development of US-China trade talk along with a second good news of extradition bill withdrawal in Hong Kong on Thursday.

Goldman Sachs gives a buy on Suncorp- Media Report

The financial sector company Suncorp now has gained more strength on the ‘buy’ recommendation of investment banking group Goldman Sachs.

On Friday, the media report stated that Goldman Sachs has completed the review of the insurance stocks’ earnings and ASX-listed Suncorp remain its favorite! As per the report, the broker is showing its inclination more towards the general insurance stocks over health insurance, though it has always considered that the risks to earnings are building.

Following the earnings review, Goldman Sachs rated a ‘buy’ recommendation for Suncorp on the support of its profit results where the company has reported a cash earnings of $1.115 billion, up 1.5% on FY2018, with strong strategic investments.

Financial Result of the Company for FY2019

Suncorp’s Net Profit After Tax stood at $175 million, down 83.5%, due to $910 million non-cash loss on the sale of the Australian Life Insurance and Practicing Wealth Business. The divestment outlines the company’s objective to improve the performance of its core banking and insurance businesses.

In Fiscal 2019, Suncorp paid a total dividend of 70 cents per share, including a final dividend of 44 cents per share and a special dividend of 8 cents per share on the sale of Australian Life Insurance and Participating Wealth Business. This translates a pay-out ratio of ~81.2% of cash earnings.

Suncorp’s Financial Results for FY2019 (Source: Company Report)

The group has experienced an encouraging growth in its digital users both across Insurance and Banking sector. It has invested further in digital capabilities to drive momentum in the core business which in turn has also enhanced the self-service functionality reducing number of service calls received and mailpacks sent.

FY2020 Outlook

Insurance (Australia) primarily targets to reinvigorate its multi-brand strategy with state-based campaigns and enhanced propositions for mass brands including AAMI, GIO and Suncorp, building on the digital foundations established over the last two years. For FY20 the company aims to focus on maintaining target profitability through disciplined underwriting and risk selection in commercial portfolio; achieve stable retention and improved unit growth in the Home and Motor portfolios into FY20 and beyond through revised marketing campaigns and digital initiatives to improve sales.

With respect to natural hazard, the company has increased the allowance amount for Fiscal 2020 to $820 million from $720 million and the group has purchased an additional $200 million aggregate stop loss for $45 million. The increase in natural hazard allowance represents a A$9m increase in New Zealand’s share of the allowance to A$49 million, up from A$40 million in FY19, and a $91 million increase to Insurance (Australia)’s share of the allowance to $771 million, up from $680m in FY19.

Regulatory project costs associated with claims and policy handling are projected to be higher in FY20, as per the company’s information. The magnitude of the increase in the natural hazard allowance and the cost of the stop loss cover will impact the Group’s ability to achieve its target of at least 12% underlying ITR in FY20, and will make it difficult for the company to achieve a ROE target of 10% in FY20.

(Source: Company Report)

SUN forecasts to increase its original Fiscal 2020 net Business Improvement Program (BIP) benefits target of $329 million and is reportedly on track to deliver $380 million of net benefits. The major streams of work for FY20 include:

• Continue to optimise and embed claims improvements through automated triage, prioritisation and pathing of claims, fraud minimisation and investment in business intelligence to improve return to work outcomes for customers and claims performance.
• Digital functionality enhancements, including expanding the Intelligent Virtual Assistant across additional brands, improved speech analytics and the continued drive to digital versus paper communications
• Process automation, in particular to support home lending growth
• Continuation of the procurement program, including claims procurement
• A stranded cost program, focusing on personnel, real estate and supplier costs.

Also, for the financial year 2020, the company has maintained its key focus area on the digitisation of the organisation and continued advancement in self-service and knowledge management capabilities across primary digital assets. These initiatives include launch of an AAMI Insurance App that would enhance customer experience and provide simplified quote and buy capabilities

Suncorp future plan also include the continuous improvement in the experience of its of customers by eliminating pain points to make processes easier. This includes increasing the pre-population of customer information to drive efficiency and deliver personalised customer experiences; Strengthening trust with customers through increased transparency to drive better customer outcomes supported by the Group Customer Advocate office as well as continuing to roll out initiatives to drive customer engagement and interaction through targeted brand propositions and improvements to the Reward and Recognition program.

The Annual General Meeting (AGM) of the company is scheduled to be held on 26 September 2019 in Brisbane, Queensland. Subject to shareholder approval at that meeting, Suncorp’s Board has proposed to distribute the remaining surplus from divested business in a form of capital return of 39 cents per share with a related share consolidation to its shareholders. The company further seeks to maintain a dividend pay-out ratio within the range of 60% to 80% of cash earnings.

Stock Performance

SUN stock price last traded at $13.780, up 0.731, on 6 September 2019. As per the buy recommendation of Goldman Sachs, the target stock price is to range within $14.13, said media report.

The stock today (Friday, 6 September 2019) has closed with a price to earnings multiple of 101.030x with a market capital capitalisation of $17.76 billion. Over the past one month, the stock has surged up by 3.79% and the year-to-date return of the stock stands at 11.15%.

Also Read: Suncorp Group Ended The March Quarter With Total Lending Portfolio Of $58.9 Billion

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