Brokers Mixed Post Suncorp-Metway Earnings Shock

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This story features ANZ GROUP HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: ANZ
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

ANZ Bank ((ANZ)) and National Australia Bank ((NAB)) may have set the ball rolling in terms of lowering earnings expectations in the banking sector but Suncorp-Metway ((SUN)) has well and truly joined the party after last Friday cutting earnings guidance to a net profit for FY08 of $525-$550 million, down from pervious market expectations of a result of around $700 million.

The revised earnings outlook has resulted in significant cuts to earnings estimates, with UBS lowering its earnings per share (EPS) estimates in FY08 by 18% and in FY09 and FY10 by 16% to 59c, 84c and 96c respectively, while ABN Amro has dropped its forecasts to 57.2c, 96.9c and 114.7c for the same period. JP Morgan is at 57.6c, 96.3c and 122.7c.

While the shares were accordingly sold down in the aftermath of the guidance revision there remains some uncertainty about the company’s outlook, as evidenced by the fact the FNArena database now shows three Buy ratings, six Holds and one Sell, which comes courtesy of UBS after the broker downgraded the stock from Hold.

In the latter’s view there remains downside risk to earnings as in the insurance operations there is evidence of a decline in core profitability and a decline in releases, while the wealth management operations will continue to face difficult market conditions and so will struggle from an earnings perspective.

The broker also points out the banking side remains over-exposed to the commercial property market at present, while ABN Amro also sees the banking division suffering from a general slowing in loan growth and an increase in the level of bad and doubtful debts. As well the broker noticed the group has released most of the hollow logs or reserves it had tucked away in the insurance operations and so won’t be able to augment profits to the same extent in coming years.

Having sliced its earnings numbers UBS has also cut its valuation on the stock to $10.00 from $14.95 and given the earnings headwinds and poor sentiment surrounding the stock it suggests this all adds up to further share price underperformance, hence its move to a Sell.

Credit Suisse is one to disagree though, the broker taking the view that yes sentiment is poor at present, which sees its earnings estimates cut and its price target lowered from $18.00 to $16.00. But, allowing for this, it sees longer-term value in the stock around current levels given the extent of the share price falls (the stock has effectively halved in value since last year) and so retains its Buy rating.

JP Morgan in contrast rates the stock as Neutral but sees some potential good news in FY09 as it expects insurance margins to recover from around 8% this year to 10-12% next year. This suggests there is limited downside to group earnings from the insurance side of the business, which is important as it accounts for around 50% of group profit.

On the other side of the coin the fact the dividend payout ratio has risen signifiantly implies payouts are likely to be flat through FY10, though the broker estimates the group should have enough capital so there won’t be a need for the FY09 dividend to be underwritten. In the broker’s view the stock is cheap at present, particularly with respect to the other general insurers in the market, but with sentiment poor and little chance of any outperformance it sees no reason to shift from its current rating.

Post the revision in earnings guidance the average price target on Suncorp-Metway has fallen to $13.99 from $15.86, though taking out Merrill Lynch’s pre-ervision $18.00 target and the average is now a little below $13.50.

Shares in Suncorp-Metway this morning are slightly lower and as at 11.30am the stock was down 11c at $11.42. Its trading range over the past 12 months has been $10.90 to $21.50.

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