James Gerrish

Suncorp (SUN) have reported their FY 2018 results this morning with a number of clear takeaways. This was a stronger result than expected pretty much across the board, and the share price has responded.

It included a 5% beat in terms of cash NPAT, an 8cps special dividend coming as a surprise and the sale of their Life Insurance Business with $600m (~46cps) going back to shareholders on completion.

However, the main takeaway for us is the acknowledgment that momentum in the business thanks to the ongoing business improvement program is strong while costs are being well managed = strong future leverage.

What we liked

Six months ago, SUN hung their hat on a strong second half, they backed themselves in from a long way out and it seems they’re on track to deliver on most metrics.

The business improvement program is working with SUN exceeding their net benefits target of $30m for the year while they’ve addressed the Life Insurance issue by flicking the business for $725m with $600m going back to shareholders on completion.

There was pressure on the CEO Michael Cameron to start delivering on a range of promises and today's result should go a long way to satisfy the market's concerns.

What we didn’t like

The bears will concentrate on the softer than expected result in SUN’s banking division and there is some substance to those calls. Banking income fell by 4% from 1H18 to 2H18 and was flat from FY17 to FY18, however as shown yesterday through CBA’s result, times are fairly tough in this market.

Net Interest Margins (NIM) came in at 1.84% versus expectations for 1.86% while the banks dad debt charge was $27m or 5bp. Tier 1 capital was in line at 9.1%. So, an okay set of numbers from the banking division however the insurance result is what had driven the beat here.

Targets $16 on the upside

In short, it is still a buy. However it has run hard leading into these numbers and without stating the obvious, it’s less compelling now than it was at $12.

From a relative sense, buying SUN on 14.5x and selling IAG on 18.5x next year’s earnings makes sense to us.

You can listen here to our 3-minute read through of the report in this Direct From The Desk.

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