Expansion In Asia And Digital Initiatives Will Drive Future Efficiency

Key Takeaways

• Expansion in Asia and strong SLC Management performance promise revenue growth through enhanced sales and increased management fees.
  
• Digital initiatives and U.S. business adjustments are expected to boost efficiency, margins, and earnings, alongside enhanced earnings per share from share buybacks.
  
• Increased claims severity and foreign currency movements threaten profitability and earnings stability, requiring effective mitigation strategies and pricing adjustments.

Catalysts

A financial services company, provides asset management, wealth, insurance and health solutions to individual and institutional customers in Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India, China, Australia, Singapore, Vietnam, Malaysia, and Bermuda.

• Sun Life's expansion in Asia, particularly through bancassurance and agency channels, indicates potential for increased individual protection sales, likely enhancing revenue growth.
  
• Strong performance in SLC Management with record capital raising in asset management suggests future revenue growth from increased management fees.
  
• Digital initiatives, such as the Advisor Buddy AI tool in the Philippines and the virtual care platform in Canada, are expected to drive efficiency and improve client interactions, potentially boosting net margins.
  
• Expected stabilization and increased pricing in the U.S. Dental business, along with pricing adjustments in the medical stop-loss segment, could contribute to improved margins and earnings in the U.S. Health and Risk Solutions.
  
• Share buybacks, supported by a strong capital position (LICAT ratio of 152%), are likely to reduce the number of shares outstanding, leading to enhanced earnings per share in the future.

Sun Life Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sun Life Financial's revenue will grow by 16.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.2% today to 8.1% in 3 years time.
• Analysts expect earnings to reach CA$4.2 billion (and earnings per share of CA$7.49) by about April 2028, up from CA$3.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.4x on those 2028 earnings, down from 14.2x today. This future PE is greater than the current PE for the CA Insurance industry at 12.5x.
• Analysts expect the number of shares outstanding to decline by 1.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.96%, as per the Simply Wall St company report.

Sun Life Financial Future Earnings Per Share Growth

Risks

• The unfavorable morbidity experience in the U.S. stop-loss business due to increased claim severity could pressure profitability and reduce earnings if not adequately offset by pricing adjustments.
  
• Weaker performance in the U.S. business, particularly in medical stop-loss and dental, driven by factors like higher claims severity and onetime ASO remediation payments, might strain net margins if not mitigated.
  
• Institutional outflows and retail challenges in MFS, despite strong product performance, could influence overall asset management performance and thus impact revenue growth.
  
• Impairment charges related to bancassurance agreements in Vietnam, reflecting industry and macroeconomic issues, suggest potential vulnerabilities that could affect future net income.
  
• The adverse impact from tax-related foreign currency movements suggests a risk of income volatility, potentially affecting reported earnings if mitigation strategies do not offset this variability effectively.

Valuation

• The analysts have a consensus price target of CA$87.846 for Sun Life Financial 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 CA$96.0, and the most bearish reporting a price target of just CA$72.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$52.0 billion, earnings will come to CA$4.2 billion, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 6.0%.
• Given the current share price of CA$76.11, the analyst price target of CA$87.85 is 13.4% higher.
• 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.