Equities
We recap some of the profit reporting season highlights from the past week Commonwealth Bank of Australia, Suncorp Group, Insurance Australia Group, Bendigo and Adelaide Bank, National Australia Bank, Praemium and AMP. Full reports are available below via links.
Commonwealth Bank of Australia (CBA)
CBA’s cash NPAT (continuing) decreased by ~5% pcp to $8.5bn; impacted by 2% pcp lower total operating income of $24.4bn and 2% pcp higher operating expenses of $11.3bn, resulting in -4% “Jaws” – although the underlying components were largely in line with our forecasts. While analysis suggests a much weaker 2H19 result, CBA had a better end result in the sense that 4Q19 statutory NPAT was ~$2.22bn (vs. unaudited ~$1.75bn in 3Q19) while 4Q19 cash NPAT for continuing operations was ~$2.11bn (vs. unaudited ~$1.70bn in 3Q19), and the final quarter outcomes were underpinned by lower customer remediation and program provisions.
We have lowered our cash NPAT (continuing) estimates by 3% across the forecast horizon largely due to ~4bp softer NIM (as guided by CBA) and weaker banking fees and commissions. However, we have maintained our price target at $86.00 price target with a Buy rating in anticipation of a capital return in the near future.
Suncorp Bank (SUN)
SUN had a great result due to stronger New Zealand general insurance contributions and lower net Australian incurred claims and higher returns (largely mark-to-market gains as a result of lower risk free rates). The result was also underpinned by strong overall New Zealand top-line growth, a benign natural hazard environment, significant margin improvement in the commercial portfolio in Insurance (Australia), ongoing Business Improvement Program benefits and higher reserve releases at 3.8% of NEP (vs. 1.5% long run average) – all achieved despite higher regulatory project costs and remediation provisions. SUN’s 2019 Cash NPAT increased by almost 2% pcp to $1,115m.
We have increased cash NPAT by 2% across the forecast horizon after factoring in stronger performance within Insurance (Australia). The price target is increased by 1% to $14.60 (previously $14.50) and SUN’s Buy rating is reinstated based on value (i.e. a 12-month total expected return of >15%).
Insurance Australia Group (IAG)
It was another solid result from IAG that met management but not market expectations. While GWP increased by ~3% to $12.0bn, NEP was ~6% pcp lower at $7.2bn given higher reinsurance costs due to the full year impact of quota share arrangements. Both underwriting profit and insurance profit would have been much lower if not for stable claims experience, tight cost management and higher investment income on technical reserves (+40% pcp to $321m mainly due to mark-to-market gains from lower risk-free rates). Similar to SUN’s 2019 experience, it was a tale of two halves for IAG. 1H19 performance was impacted by higher net claims expense including reduced reserve releases, higher reinsurance expenses and lower investment returns but 2H19 performance saw a rebound in GWP growth and higher investment returns in addition to lower net claims.
Despite variations in P&L line items, our cash NPAT forecast changes are immaterial and we have left the $8.60 price target unchanged. As a result of the adverse market reaction and noting 2H19 performance was strong, we believe investor expectations have been rebased to more sensible levels and reinstate a Buy rating based on a 12-month expected return of >15%.
Bendigo and Adelaide Bank (BEN)
BEN’s 2019 cash NPAT (-7% pcp to $416m) appeared much weaker at first glance, having missed our forecast despite a lower credit charge (-29% pcp to $50m). This was largely the result of lower Homesafe contributions (both realised and unrealised) and higher operating expenses. The overall picture was, however, more positive on an underlying basis. This was after adding back remediation ($17m vs. <$1m in FY18) and redundancy ($12m vs. $2m in FY18) costs, and cash NPAT was only down by 2.5% pcp at $436m (vs. $447m in FY18) as a result. Adding to today’s optimism (and favourable market reaction) was a surprise positive NIM outcome especially in 2H19, better than expected volume growth helped by strong customer retention and a commitment to drive the cost-to-income ratio (CIR) down to ~50% in the medium term. Organic capital generation continues to be strong, leading to a 30bp higher CET1 ratio of 8.9%. While BEN is still assessing the benefits of APRA’s consultation package on changes to credit risk weights, we expect the regional to be well-positioned in supporting dividends at current levels (still targeting 60-80% payout).
Our estimates are largely unchanged and we have maintained BEN’s $10.80 price target and Hold rating.
National Australia Bank (NAB)
NAB’s 3Q19 result was stronger than expected with robust top line growth including margin expansion and ongoing cost discipline being the key highlights in a challenging environment. Incoming CEO Ross McEwan will likely have his hands full but he should significantly add to positive momentum in the bank’s underlying performance in due course.
NAB’s 3Q19 unaudited cash earnings of $1.65bn are ahead of our ~$1.53bn forecast but we are mindful of the fact that the former figure included very minimal remediation costs if any. As a result, we have made only minor changes to our estimates. Given the benefit of additional DCF time creep and having lowered the required dividend yield for valuation purposes from 6.00% to a more sustainable 5.50% in a low rate environment, we have increased NAB’s price target by around 5% to $29.00. The Buy rating is unchanged for this turnaround story.
Praemium (PPS)
PPS is back on track with the Australian division surpassing $15m EBITDA for the first time, and with guidance the international business will reach breakeven at some point next year (in calendar 2020). The strong platform flows seen in the international business in the June quarter, has so far continued into the current quarter and the Australian platform margin remained stable at ~25bps.
PPS’s step change in investment in the business over the last year is starting to deliver a broader earnings base, providing varying levels of new revenue for the Group. This was a good result, with tight cost control helping to see EBITDA margins increase from 20% to 25% from FY18 to FY19 and moving the business closer to considering its first dividend (which we forecast will commence in FY21).
Following the FY19 result we have upgraded our underlying Cash EPS by 3.4%, 5.8% and 7.5% for FY20, FY21 and FY22 respectively. The earnings revision is primarily driven by better cost control, along with a stable revenue margin in the Australian platform division (vs a slight decline expectation). Following our earnings revisions our revised Price Target is $0.70 per share (previously $0.66), with our Buy recommendation remaining unchanged.
AMP (AMP)
AMP continues to burn through shareholder capital, and is asking investors for at least a further $650m more, to add to its bucket of cash to tackle its new strategy, at roughly -15% dilution to current shareholders.
We have seen this all before. In fact, twice since AMP and AXA merged has the company embarked on a cost-reduction program totally $400m in pre-tax savings from both initiatives. On both previous occasions the headwinds in the business largely hid the gains made. This time it is $300m, but we suspect much of this has already been flagged in savings, not to mention we are currently experiencing an over 10% spike in controllable costs in the current financial year.
Net-net, the equity dilution, lower ongoing earnings from Life, headwinds in AMP CWM, flat earnings elsewhere, ongoing regulatory risk, execution risk, and potential for more client refunds down the track, offsets the gains from the $300m savings.
Following AMP’s quarterly update, we have revised our Price Target to $1.32 per share (previously $1.45), and retain our Sell recommendation.