Suncorp’s Earnings Pre-Release Gets Mixed Reviews

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By Chris Shaw

Last Friday Suncorp-Metway ((SUN)) updated earnings guidance for FY09 with its pre-release of results indicating profit would be in a range of $340-$360 million, an outcome below market expectations given Citi, for example, had been forecasting a result of around $466 million.

Bank of America Merrill Lynch agrees the pre-release was disappointing as in its view it showed the bank is continuing to do it tough with sub-system volume growth at the same time as margins continue to be squeezed, while it also noted insurance margins were slightly lower than expected.

The only good news out of the update in the broker’s view was the fact impairment charges remain in line with expectations at a level of between 125-135 basis points, JP Morgan noting the level of bad debts in the banking business had been a key issue of concern for the market with respect to the company.

RBS Australia took a similar view as it suggests the other earnings surprises such as the uncertain quality of the insurance result are largely based on one-off factors, so the fact bad debts haven’t gotten worse is actually a positive for the group and the market’s assessment of its provisioning levels.

Given the pre-release was below most expectations, the majority of brokers have reacted by cutting earnings forecasts, Bank of America Merrill Lynch an exception as it wants to see the actual quality of the result before adjusting its numbers. Citi has been relatively aggressive in lowering its FY09 number by 19%, though the broker makes only minor changes to its later year estimates.

Citi is now forecasting earnings per share (EPS) of 50c in FY09 and 59c in FY10, down from 62c and 60c respectively, while JP Morgan is forecasting 61.4c and 52.5c in normalised terms respectively. RBS Australia’s new EPS forecasts are 57.4c and 59.2c after it cut its FY09 estimate by 12%, while the FNArena database shows consensus EPS estimates of 56.9c and 58.7c respectively.

Given earnings guidance for FY09 was lower than the market had expected the fact the stock fell only slightly on the news leads Bank of America Merrill Lynch to suggest the shares are trading on takeover speculation rather than fundamentals. This creates a value question as the broker argues the current share price already factors in break-up levels, which implies there is little further upside. To reflect this BA-ML retains its Underperform rating.

Citi agrees the recent gains in the share price reflect increasing takeover speculation surrounding the company and given it expects any such outcome will be a drawn out process, Citi sees a near-term correction as likely. As a result, while the broker notes its break-up sum-of-the-parts valuation for the company is $9.42, which is well above the current share price, it has downgraded to a Sell recommendation. Morgan Stanley agrees the stock is expensive at curent levels and so it too rates the shares as Underweight.

In contrast JP Morgan has retained its Overweight rating as it takes the view as the market gets more confident with the group’s bad debt outlook, and the latest update should help here in its opinion, as there is evidence of rate increases in general insurance and as Patrick Snowball settles in as the new CEO there is additional upside in the stock.

The broker has lifted its valuation based price target to $8.75 from $8.10, while pointing out this is based on very conservative sum-of-the-parts assumptions. RBS Australia has made a similar move in lifting its target to $8.80 from $7.38, which reflects the removal of a 15% discount to valuation given macroeconomic conditions continue to show improvement and this should reflect positively on the bank’s bad debt position in its view.

Post the earnings update from management the FNArena database shows the company is rated as Buy four times, Hold three times, Reduce once and Sell twice, with an average price target of $7.73, up from $7.41 previously. Shares in Suncorp-Metway today are down slightly in a stronger market and as at 11.05am the stock was 4c lower at $7.86. This compares to a trading range over the past year of $4.36 to $13.20.

Note: Morgan Stanley is not represented in the database overview.

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