Suncorp Metway has given analysts an update, which is always good for boosting their flagging spirits. The company is Australia´s largest domestic general insurer and has the somewhat troubled regional banking franchise in Queensland. Its capital position is reasonable, but general insurance is a high-risk business and likely to get riskier. The update was the usual reassurances about efficiency and cost control, which is a given, not a strategy. And it does little to remove the riskiness associated with the stock. Deutsche has a buy on the stock, and a bullish price target of $9.50:
SUN’s key GI business is back on track to deliver a 12% FY12 underlying ITR originally promised under its May-10 ‘Building Blocks’ initiative with a stronger 2H12 run-rate also suggesting further margin expansion ahead in FY13 despite rising RI costs and lower bond yields. Furthermore, SUN’s newly unveiled ‘simplification’ project has the potential to add 10% to profit by FY16 and while we are reluctant to factor in long-dated benefits given potential reinvestment for growth, management execution credentials suggest upside risks here. Buy.
The estimated dividend yield for this financial year is adequate at 5.5%, but the stock has all the risks associated with the finance sector. Regional banking in Australia is under even more pressure than the majors. Macquarie has upgraded it recommendation to neutral and has a price target of $8.62:
We do not expect Suncorp is in a position to announce a capital management initiative in the short term as the current level of capital: 1) provides flexibility re risk retention within the P&C company (SUN reinsurance arrangements renew on 1 July 2012); 2) supports the A+ credit rating in Suncorp bank; 3) assists in managing the capital demands in the life company; 4) provides a buffer ahead of the finalisation of the APRA LAGIC regulatory capital standards; 5) is necessary as the impaired assets in the Non Core Bank decline at a modest rate; and 6) allows conservatism, given the level of market volatility/uncertainty.
Macquarie is arguing that recent share price declines have made the stock fair value, arguing that the current share price more accurately reflects the balance of risks around under-provisioning within the non-core bank. But it is hardly a ringing endorsement.