Suncorp and IAG earn analysts’ nod
Analysts poring over profit announcements from Australia’s two leading local insurers have found cause for optimism, with most displaying new enthusiasm for Suncorp.
Last week Suncorp and IAG announced large rises in profit and net income for the first half of the financial year, due to a relatively benign catastrophe season and better-than-expected investment returns.
Suncorp net profit rose 47% to $574 million, while IAG more than doubled net income to $461 million.
Analysts contacted by insuranceNEWS.com.au generally agree Suncorp has more room to increase shareholder value, despite IAG reporting a larger rise in profit and the stockmarket’s negative response to Suncorp’s first-half results.
Suncorp delivered a lower-than-expected dividend of 52 cents – between eight cents and 28 cents short of what analysts predicted. The group’s shares fell nearly 5% in early trading last Wednesday before finishing the day at $11.56, down 1%. By Thursday the shares had recovered to $11.68.
In contrast, the market responded well to IAG’s profit announcement, with shares opening at $5.42 on Thursday before rising 5% and later closing at $5.57, up 2.77%.
IAG shares have risen almost 90% in 12 months and are now at their highest point since mid-2007. Suncorp has increased its share price by about 40% over the same period and is now trading at four-year highs.
One analyst contacted by insuranceNEWS.com.au says the market is taking “a myopic view” of IAG.
“People are getting very excited about short-term trends,” he said. “You have to look through the spikes in profits that you get from abnormal influences.
“We have become a bit more cautious on these stocks but the market takes a bit longer to recognise this.”
All analysts contacted by insuranceNEWS.com.au put either a “hold” or “neutral” rating on IAG and Suncorp.
Concerns over IAG stem from a perceived over-valuation of the insurer’s stock price.
Merrill Lynch Bank of America says in a note to clients that IAG’s earnings update is a “great result”, but cautions that “our issue is one of valuation”.
“We think the market is putting high multiples on peak earnings. This may continue for a little while given earnings prospects look solid for another 12 months.”
In contrast, the investment firm feels Suncorp has more potential to improve earnings. Merrill Lynch Bank of America expects an 18% return on equity (ROE) for IAG in the current financial year, against 8% for Suncorp.
“One of the most significant differences between IAG and Suncorp is expected ROE,” the report says. “This accounts for a lot of the difference in how the two stocks are being priced.
“While there will always be up and down points for Suncorp, we believe the investment thesis is very clear and largely unchanged.
“If anything we walk away from the [Suncorp] result more encouraged on the capital side of the theme.”
Credit Suisse analyst Andrew Adams says he does not see either stock as overvalued, but warns investment incomes are a hidden danger.
“The number one risk is clearly bond yields and they both had significant declines in running yields,” Mr Adams told insuranceNEWS.com.au. “You can offset that with benign weather but we just don’t know how low bond yields can go.”
He agrees there is “less upside” to IAG because most of its businesses “are already performing quite well”.
JP Morgan analyst Siddharth Parameswaran says the outlook for both insurers is positive.
“Weather can derail everything, inflation has been steady and there are a couple of scheme reviews on compulsory third party that could have an impact,” he said. “But at the moment it looks like a good environment.”