Bank Sale Will Strengthen Focus On Core Insurance Operations

Key Takeaways

• The transition to a pure-play insurer and digital modernization enhances operational focus, efficiency, and net profit margins.
  
• Capital management and share buybacks post-bank sale boost earnings per share by reducing share count.
  
• Rising inflation, supply chain challenges, and competitive pressures could impact claims costs, revenue growth, and profit margins amid climate risks and reinsurance changes.

Catalysts

Provides insurance and banking products and services to retail, corporate, and commercial customers in Australia and New Zealand.

• The completion of the bank sale strengthens Suncorp Group’s focus as a pure-play insurer, which could enhance revenue and net profit margins by allowing the company to reallocate resources towards its core insurance business.
  
• The ongoing investment in platform modernization, including migrating data to the cloud and upgrading pricing infrastructure, is expected to drive efficiency and improve underwriting margins.
  
• The successful pricing of the FY '25 reinsurance program amid stability in the reinsurance market could help control future input costs, positively impacting future earnings.
  
• The transition towards a digital insurer, supported by investments in a modern policy administration system, aims to enhance operational efficiency and customer propositions, which may result in increased revenue and net margins.
  
• Systematic share buybacks and careful capital management, including the return of proceeds from the bank sale, are anticipated to enhance earnings per share (EPS) by reducing the share count.

Suncorp Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Suncorp Group's revenue will grow by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.1% today to 9.2% in 3 years time.
• Analysts expect earnings to reach A$1.3 billion (and earnings per share of A$1.13) by about February 2028, up from A$939.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.1x on those 2028 earnings, down from 27.4x today. This future PE is lower than the current PE for the AU Insurance industry at 24.2x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.02%, as per the Simply Wall St company report.

Suncorp Group Future Earnings Per Share Growth

Risks

• Rising inflationary pressures and ongoing supply chain challenges, particularly in motor and home insurance, could result in increased claims costs, affecting net margins and overall profitability.
  
• The potential inability to maintain premium pricing above inflation rates due to increased competition could lead to diminished revenue growth and profit margins.
  
• Climate change impacts and natural hazard-related claims, which have historically exceeded allowances, could continually pressure financial performance, potentially affecting earnings stability.
  
• Changes in reinsurance structures and costs, particularly with the non-renewal of certain covers like aggregate covers, may expose the company to more volatility in earnings and increased risk.
  
• Execution risks associated with technological modernization and AI deployment, given the capital investment and complexity involved, could affect expense ratios and expected efficiency gains.

Valuation

• The analysts have a consensus price target of A$20.22 for Suncorp Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$22.7, and the most bearish reporting a price target of just A$14.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$13.9 billion, earnings will come to A$1.3 billion, and it would be trading on a PE ratio of 24.1x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of A$20.21, the analyst price target of A$20.22 is 0.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.