Shrinking Profit Margins And Pension Reforms Will Undermine Long Term Earnings Prospects

Catalysts

About Grupo de Inversiones Suramericana

Grupo de Inversiones Suramericana is a Latin American financial holding focused on insurance, asset and wealth management, and banking through its main subsidiaries.

What are the underlying business or industry changes driving this perspective?

• Slower than anticipated declines in regional interest rates, combined with lower inflation, are likely to erode the current tailwind from high real rates for SURA Asset Management and Suramericana. This may cap fee growth and compress investment spreads, which would pressure net margins and earnings.
• Structural softening in key General Insurance lines, including autos and mandatory traffic policies amid intense price competition and regulatory constraints, could keep combined ratios elevated and undermine Suramericana's ability to restore profitability. This may limit future revenue growth and segment net income.
• Ongoing pension system reforms and recurring extraordinary withdrawals in markets such as Peru threaten the durability of AUM expansion in the Savings and Retirement business. This could dampen fee income growth and reduce the sustainability of the current double digit earnings trajectory.
• Ambitious plans to double dividends per share and materially delever by 2028 rely on continued extraordinary dividend flows and high profitability from subsidiaries. Any moderation in these upstream cash flows may force a trade off between shareholder distributions and debt reduction, constraining earnings growth per share.
• Heightened technology, regulatory and transformation spending across Suramericana and SURA Asset Management to adapt to new operating models and pension frameworks may rise faster than revenues. This could limit operating leverage gains and put downward pressure on consolidated operating margins and ROE.

Assumptions

This narrative explores a more pessimistic perspective on Grupo de Inversiones Suramericana compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Grupo de Inversiones Suramericana's revenue will grow by 6.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 9.3% today to 6.7% in 3 years time.
• The bearish analysts expect earnings to reach COP 2498.7 billion (and earnings per share of COP 7616.81) by about December 2028, down from COP 2863.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.6x on those 2028 earnings, up from 6.3x today. This future PE is greater than the current PE for the CO Diversified Financial industry at 6.5x.
• The bearish analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.77%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Grupo SURA has already delivered a compound annual growth rate of around 20% in profits since 2021 and 32% in earnings per share growth, and management targets net income per share of close to COP 10,000 by 2028. If this track record and guidance are achieved or exceeded the share price could continue to rerate upward, supporting revenue growth and earnings.
• Assets under management at SURA Asset Management have surpassed USD 200 billion, growing close to 16% with 68% of assets outperforming benchmarks over 36 months. This suggests a strong secular savings and retirement trend in the region that can sustain double digit fee income growth and expanding operating margins.
• The group’s regional financial ecosystem across insurance, asset and wealth management and banking is generating improving profitability, with adjusted return on equity at 13.8% and a stated ambition to reach around 15%. Continued efficiency gains and cross selling synergies could lift net margins and consolidated earnings.
• Management plans to reduce net debt from COP 7.1 trillion to less than COP 5 trillion while doubling dividends per share from COP 1,500 to approximately COP 3,000. If higher upstream dividends from subsidiaries and disciplined capital allocation are sustained this deleveraging and dividend growth could support valuation multiples and net profit available to shareholders.
• Current price to earnings multiples near 7 times for common shares and 6.4 times for preferred shares remain below comparable financial groups. Inclusion in the MSCI Global Small Cap Index alongside improving liquidity and visibility could drive multiple expansion toward the 10 times level that management references, lifting market capitalization faster than underlying earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Grupo de Inversiones Suramericana is COP43000.0, which represents up to two standard deviations below the consensus price target of COP52100.0. This valuation is based on what can be assumed as the expectations of Grupo de Inversiones Suramericana's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of COP67300.0, and the most bearish reporting a price target of just COP43000.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be COP37352.6 billion, earnings will come to COP2498.7 billion, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 18.8%.
  
• Given the current share price of COP55400.0, the analyst price target of COP43000.0 is 28.8% lower.
  
• 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.