Seeking Alpha • Feb 24
Sun Life Financial: Growth Consistent With My Original Thesis
Summary
Since my last article, Sun Life has grown 22.43% versus the S&P 500, which has grown 10.01%.
This comes on the back of significant QoQ margin expansion in addition to constant scale growth, with the company's AUM growing to a record $1.33tn, up from $1.26tn in September.
In my previous article, I discussed how I expected Sun Life to derive growth both from geographic expansion as well as their accelerated advances into new verticals.
Geographic growth from Asia-centric mutual funds and asset management has been supplemented by growth in American healthcare segments, with US net income rising from $85mn a year earlier to $110mn today.
Due to these continued factors and Sun Life's undervaluation - albeit somewhat diminished - I rate the company a 'buy'.
Sun Life Financial (SLF) is a Canadian life and medical insurer and mutual fund operator operating across North America and the APAC region. The company has recorded TTM revenues of $30.25bn alongside a pre-tax income of $2.89bn.
Although they continue to execute operational success as I predicted in my previous article, Sun Life has undergone a correction, beating the S&P 500 by 12.42% since publishing. As such, due to a gradual reversion to fair value, I will downgrade the company to just a 'buy'.
Introduction
Sun Life divides itself into three verticals; Wealth & Asset Management, the plurality of its AUM; Group & Shorter Duration Insurance, which encompasses its dental and medical stop-loss business; and their Traditional Insurance products, chiefly including life insurance.
Sun Life Q4 Financial Highlights (Sun Life Q4 Presentation)
The insurer maintains a diversification-focused corporate strategy, hinging upon geographic variation, such as its presence in the Philippines, India, and Vietnam, as well as revenue stream versatility with mutual fund and healthcare products and services becoming increasingly important to Sun Life.
2021 Net Income (Blue) vs 2022 (Yellow) (Sun Life Q4 Presentation)
Valuation & Financials
General Overview
In the past quarter, Sun Life has followed the general trend amongst competitors, with their share price appreciating 5.66%. Only Manulife Financial (MFC) beat out Sun Life.
Sun Life (Dark Blue) vs Competitors (TradingView)
Despite Manulife's relative overperformance, I believe that Sun Life is following the market trend, with Manulife's price rise likely a consequence of the re-opening of Chinese markets, wherein Manulife has a significant presence.
Sun Life itself continues strong growth, correcting the previous overreaction by the market to potential macro sensitivity, sustaining core segments, and focusing on margin-expanding periphery segments.
Comparable Companies
Amongst major Canadian insurers, Sun Life faces competition in their core products from the following companies; Manulife is the largest Canadian life insurer by market cap, with less product diversity but differing geographic; the Power Corporation of Canada (POW:CA) is a conglomerate of finance-centric companies, ranging from Canada LifeCo to Wealthsimple; and Intact Financial (IFC:CA) is an insurer with interests spread across life, property, auto, and more.
barchart.com
When considering comparative financials, Sun Life outperforms all peers in 5-year earnings growth, likely a result of aggressive horizontal and vertical growth across all of Sun Life's platforms, while ensuring consistent margins.
On a pure multiples' basis, however, Sun Life does not stand out in any particular way. Positively, they often perform second-best behind either Manulife or Intact Financial. The company's lack of exceptional performance relates to general margin compression caused by rate increases and enduring inflationary pressures.
Valuation
According to my DCF model, Sun Life, at its base case, is undervalued by ~12%, with its fair value being $54.59/share. The model operates on a net premium basis, assuming a discount rate of 8%- Sun Life's WACC- and a perpetuity rate of 2%, in line with the growth of the general economy.
AlphaSpread
Sun Life is similarly undervalued on a multiples-centric relative valuation. At its base case, AlphaSpread's relative valuation estimates that Sun Life is undervalued by 7%, being worth CAD71.33/share or, on the NYSE, $52.15/share.
Thus, using a means-based approach, Sun Life should be valued at $53.37 or ~9.5% higher than current prices.
Sun Life Continues to Follow My Predicted Trajectory
Supported chiefly by its medium-term rally, my thesis on Sun Life originally surrounded its strength through its global presence and capitalization on broad trends including healthcare, digitalization, asset management, and alternative credit markets.
Not only does Sun Life have noteworthy exposure to high-growth markets in the Philippines, India, and Vietnam, but become a market leader in their respective insurance and mutual fund industries. Furthermore, with the low penetration in these markets, Sun Life positions itself for superior returns. And within healthcare, Sun Life is driving synergetic growth with DentaQuest, PinnacleCare, and telehealth platforms.
More recently, Sun Life has increased the accessibility of their insurance products across Asia with bancassurance partnerships with Hong Kong- a new market for Sun Life- bank, Dah Sing Bank, as well as being one of the fastest growing insurers in Vietnam through a similar bancassurance strategy.
Asia Sales Breakdown (Sun Life Q4 Presentation)
In health and benefits, primarily in the US, Sun Life has worked towards expanding DentaQuest's Advantage Dental+ care practices, with four new offices in Florida, expanded digital automation in healthcare processes, and increased the accuracy of healthcare diagnoses and opinions through the continued integration of PinnacleCare and its suite of technologies.
Wall Street Consensus
Analysts echo my positive opinion on Sun Life, forecasting an average share price increase of 11.81% to $54.50/share over the next year. This is in line with my base case DCF, which is estimated at $54.59/share.
TradingView
Even the maximum projected price decline of -5.50% is relatively tame to the regular volatility of the market, proving Sun Life's worth as a safe haven stock.
Risks
