The $900 million capital raising Suncorp ‘had to have’
Analysts are viewing Suncorp’s $900 million capital raising as a necessary exercise, even if the circumstances which prompted it are far from ideal.
Last week the Brisbane-based group announced a $900 million capital raising and the imminent departure of CEO John Mulcahy, who has borne the brunt of considerable shareholder criticism about Suncorp’s poor market performance.
JP Morgan analyst Siddharth Parameswaran says the capital injection will help improve sentiment about the group in the long run.
“The general insurer is OK, so put that aside,” he said.
JP Morgan’s analysis says Suncorp’s general insurance trends seem reasonable after normalising for the impact of wider credit spreads, storm losses and reduced yields on shareholder funds.
It says the key disappointment comes from banking, which will report a substantially higher first-half bad debt charge ($355 million versus previous guidance of around $120 million).
“People were really worried that it didn’t have enough capital and they were really worried about the bad debts,” Mr Parameswaran said. “It’s a bad combination.”
“They have done it at such a deep discount (35% off the February 4 closing price ) – I was stunned at how cheap they are doing it – but in the long-run the sentiment weighing against them will disappear.”
Credit Suisse analyst Arjan Van Veen expressed less surprise at the extent of the discount
“Given the issues involved, you want to make sure there’s a deep enough discount – it’s just insurance,” he said. “The cost of underwriting the issue would be greater at a lower discount.”
Mr Van Veen says that, putting the bad debt aside, the real issue now is that the bank is 30% of the business.
“It’s dragging down the entire share price, and the underlying trends for the insurance business are actually very good,” he said.
“In commercial lines, price increases are much higher than we would have expected.”
Last week the Brisbane-based group announced a $900 million capital raising and the imminent departure of CEO John Mulcahy, who has borne the brunt of considerable shareholder criticism about Suncorp’s poor market performance.
JP Morgan analyst Siddharth Parameswaran says the capital injection will help improve sentiment about the group in the long run.
“The general insurer is OK, so put that aside,” he said.
JP Morgan’s analysis says Suncorp’s general insurance trends seem reasonable after normalising for the impact of wider credit spreads, storm losses and reduced yields on shareholder funds.
It says the key disappointment comes from banking, which will report a substantially higher first-half bad debt charge ($355 million versus previous guidance of around $120 million).
“People were really worried that it didn’t have enough capital and they were really worried about the bad debts,” Mr Parameswaran said. “It’s a bad combination.”
“They have done it at such a deep discount (35% off the February 4 closing price ) – I was stunned at how cheap they are doing it – but in the long-run the sentiment weighing against them will disappear.”
Credit Suisse analyst Arjan Van Veen expressed less surprise at the extent of the discount
“Given the issues involved, you want to make sure there’s a deep enough discount – it’s just insurance,” he said. “The cost of underwriting the issue would be greater at a lower discount.”
Mr Van Veen says that, putting the bad debt aside, the real issue now is that the bank is 30% of the business.
“It’s dragging down the entire share price, and the underlying trends for the insurance business are actually very good,” he said.
“In commercial lines, price increases are much higher than we would have expected.”