Treasure Chest: Suncorp Re-Rating Draws Nearer

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This story features SUNCORP GROUP LIMITED.
For more info SHARE ANALYSIS: SUN
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

As half bank, half insurance company, Suncorp ((SUN)) took a sizeable bath share price-wise in 2008 as the GFC bit and the company’s banking exposure to tenuous South-East Queensland borrowers scared investors away. The shares recovered half their loss in 2009, and up until mid last year bungled along going nowhere as investors scorned an operation which was half this, half that and not apparently all that good at either.

QBE Insurance ((QBE)), which also has its roots in Queensland but by the GFC had expanded nationally and internationally with well-received acquisitions, fell sharply but briefly in 2008 before recovering most of its lost share price ground through 2009. Yet up until the beginning of this year, the QBE share price has done nothing but trundle lower.

Both companies were hit by fire and flood catastrophes in Australia and for QBE the catastrophe score surged further with disasters in the US. In this latest rally, nevertheless, both share prices have performed very well driven not just by a return to “risk on” attitude but by premium increases following the run of catastrophes and belief that a fresh, less catastrophic cycle must now be upon us.

For BA-Merrill Lynch, QBE is a “very different business” to that of its pre-GFC, market darling heyday and despite a recent substantial rally, Merrills notes neither analysts nor fund managers are convinced of QBE’s recovery potential. The company now features much lower growth, is more cyclical, higher risk and has a weaker balance sheet. Merrills’ analysts suggest QBE can no longer be valued against earlier valuation models. A transition plan out of the hole QBE has found itself in is in place but will take a long time to deliver, the analysts suggest, and in the meantime earnings remain highly leveraged to interest rates.

On the other hand, Merrills suggests “catalysts for a re-rate of SUN seem to be nearing”.

It is increasingly believed Suncorp will move to divest of large slabs of its non-core banking operations now that some value has returned to previously distressed assets this far out form the GFC. Given Suncorp under-provisioned for this distress, a sale now would still prove costly on the balance sheet. But Merrills believes the move would be well received by the market given the removal of the cloud, an increase to future earnings certainty and a lift to future earnings per share and return on equity. Investors may also become more confident with respect to future capital returns, the analysts suggest.

Suncorp will hold a Strategy Day on May 29^th and Merrills believes an opportunity will then be provided for management to lift the market’s confidence in the capacity of the life insurance business to generate better returns. The broker has a Buy rating on SUN with a $12.00 price target but if the company can “pull all these levers” a valuation of $13-14 would be more appropriate, the analysts suggest.

The FNArena database shows five Buy, two Hold and one Sell rating on Suncorp with a consensus $11.75 price target suggesting minor upside. By contrast, QBE scores only one Buy and seven Holds with a consensus target of $13.12, suggesting 4.4% downside.
 

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