Australia | Sep 04 2006
By Chris Shaw
Suncorp-Metway (SUN) may have beaten earnings expectations when it reported a profit last week of $916m, but the result is another of those to ask as many questions as it answers.
The result was slightly higher than recent guidance of $900m, but as the brokers covering the stock point out there was a large divergence in performance between the company’s general insurance operations and its banking division.
As ABN Amro notes the general insurance result was better than had been expected, but the quality of the banking result was poor and this creates uncertainty for investors. Despite this, the broker has lifted its earnings forecast for FY07 by around 3.5% to $864m, while UBS has increased its estimate by 2.2% to $870m, with both brokers maintaining their Hold ratings.
Both have based the increases in the expectation of strong margins in insurance continuing, as both see the outlook for the banking operations as more challenging despite management suggesting earnings growth for the division of around 10% was achievable.
Merrill Lynch rates the stock as Buy and takes as a positive from the result the explanation from management as to why the large reserve releases should be sustainable going forward. It expects the share price to be sustained by capital management initatives, with brokers generally looking for a buyback in the order of $300-$350m.
It has also alluded to likely dividend upside, the broker expecting others in the market to revise up their dividend estimates to match its forecasts of $1.07 in FY07 and $1.16 in FY08. These estimates compares to median forecasts in the market according to Thomson One Analytics of $1.03 and $1.09.
Despite the earnings upgrades only Macquarie has lifted its rating, to Neutral from Underperform. The FN Arena database shows the stock is now rated as Hold eight times, reflecting the view the stock is fully priced at current levels. There is also one Buy and one Sell rating on the stock. The average target price has increased thanks to the earnings upgrades though, the database showing it now stands at $20.97, compared to a pre-result average of $20.00. Thomson One shows the median target is $20.20.
Shares in Suncorp-Metway today are trading stronger in line with the broader market, as at $11.45am the stock was up 21c at $21.25.