Suncorp Group (SUN)

Fat Prophets

Thursday 19th June 2014

Fat Prophets

Suncorp Group (SUN)

What’s new?

Suncorp Group’s recent annual investor day touched on a number of aspects of the financial services company’s business, and in particular the technology initiatives underway. One, dubbed Project Ignite, is a program designed to overhaul the banking division’s core technology systems in order to streamline the business, along with enhancing customer service and product development.

The transformation will more than halve the number of complex legacy systems in the business. A project aim is to deliver a cost-to-income ratio of below 50 percent by 30 June 2016, with a 4 percent improvement slated to come from Ignite.

The current cost estimate for the project is $270 million, with 80 percent of that to be capitalised. The project is already underway and half way through implementation, with the company spending about $140 million between now and June 2016.

The project is quite ambitious however Suncorp has a strong track record of successfully executing relatively similar initiatives over the past few years.

The company’s ‘Building Blocks’ program provided $235 million in annualised savings from the consolidation of claims processes, pricing engines, employment arrangements and data and financial systems. ‘Simplification’ projects are on track to deliver $225 million in savings in FY15, increasing to $265 million in savings in FY2016.

Outlook

The streamlining of the business and cost discipline is particularly important given the ongoing challenging backdrop for Suncorp’s Life business. Recently, the company materially revised its claims and lapse assumptions and took a $500 million non-cash write down.

While the write down will negatively impact reported net profit after tax for the 2014 financial year, it will not affect cash earnings or dividends and only slightly impact the company’s healthy excess capital position. Guidance for Suncorp Life’s underlying profit after tax is pegged at between $75 million to $85 million for fiscal 2014.

Price

Price wise, Suncorp shares have staged a strong recovery in recent years since the lows of the GFC. However the shares remain well below peak levels and recent momentum could set the stage for the $15 mark being reclaimed over the next 6-12 months.

Worth Buying?

After some turbulent years, Suncorp has made solid progress in more recent times on the path to regaining investor confidence by stripping out costs, returning capital, steadying margins and divesting the non-core Bank division.

However, there is still weakness in the Life Insurance division, more improvements to be made to the bank, further costs to strip out and additional capital that could be returned to shareholders. Suncorp’s 31 December 2013 pro-forma capital position is $1.1 billion above core regulatory requirements - therefore there may be more capital management initiatives on the horizon.

Suncorp is in our view modestly priced at 14 times 2014 EPS estimates, falling to 13 times the next year. The shares also offer a prospective yield approaching 7 percent. We view this as an attractive valuation given the scope for further improvements in the business.

Therefore we believe Suncorp is worth buying at around current levels.

Disclosure: The author, and interests associated with him, hold shares in Suncorp

Greg Smith is the Head of Research at Fat Prophets sharemarket research.

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