Focusing On Pure-Play Insurance May Boost Efficiency, But Inflation And Competition Could Challenge Profitability

Key Takeaways

• Transition to a pure-play insurer is expected to streamline operations and improve efficiency, possibly leading to higher net margins.
  
• Strong capital position after divestitures allows for substantial capital returns and EPS growth, supporting financial stability and shareholder value.
  
• Pricing adjustments and increased competition may impact margins, while external economic factors and natural disasters pose risks to earnings and profitability.

Catalysts

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

• The sale of Suncorp Bank and New Zealand Life business has allowed the company to focus entirely on being a pure-play insurer, which could streamline operations and improve efficiency, potentially leading to improved net margins.
  
• The company is investing in new initiatives, such as modernizing core systems and using AI for automation, which could lead to increased efficiency and, in turn, improved net margins and earnings.
  
• Suncorp's strong capital position post-bank sale provides capacity for significant capital returns, such as buybacks, which could drive earnings per share (EPS) growth.
  
• The company has increased its natural hazard allowance, which suggests better risk management and potential stability in earnings by reducing the reliance on prior-year reserve releases.
  
• Investment in claims management resourcing and modern digital platforms is expected to enhance customer experience and potentially increase retention rates and new customer acquisitions, likely impacting future revenue growth positively.

Suncorp Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Suncorp Group's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.5% today to 8.8% in 3 years time.
• Analysts expect earnings to remain at the same level they are now, that being A$1.3 billion (with an earnings per share of A$1.14). However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$1.5 billion in earnings, and the most bearish expecting A$1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.1x on those 2028 earnings, up from 15.4x today. This future PE is greater than the current PE for the AU Insurance industry at 19.6x.
• 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 6.26%, as per the Simply Wall St company report.

Suncorp Group Future Earnings Per Share Growth

Risks

• The adjustments in pricing due to moderating inflation could result in decreased premium growth, which may impact revenue growth rates.
  
• Increased competition in the insurance market, combined with moderating inflation, might force the company to offer more competitive pricing, potentially affecting net margins and profitability.
  
• The potential resurgence of inflationary pressures, particularly in labor costs and supply chains, could increase claim costs and adversely impact earnings.
  
• The reliance on favorable investment returns and current economic conditions poses a risk, as any downturn could affect overall capital gains and earnings from the investment portfolio.
  
• Continued reliance on positive natural hazard experiences could distort future earnings expectations if significant natural disasters occur, adversely affecting the balance sheet and future profitability projections.

Valuation

• The analysts have a consensus price target of A$22.275 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$27.02, and the most bearish reporting a price target of just A$15.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$15.0 billion, earnings will come to A$1.3 billion, and it would be trading on a PE ratio of 22.1x, assuming you use a discount rate of 6.3%.
• Given the current share price of A$18.84, the analyst price target of A$22.28 is 15.4% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.