EUR 850.00 For Business Accounts Only

Morningstar | Suncorp CEO Pays the Price For Underwhelming Growth. FVE AUD 14.50 Unchanged

No-moat Suncorp Group surprised no-one with the announcement CEO Michael Cameron is stepping down. In our first-half fiscal 2018 result note published in February 2018 we stated “Longer-term we are positive on earnings growth, but any slip up will put increasing pressure on CEO Michael Cameron. Cameron started as CEO in late 2015 and financial results have been underwhelming. Cash earnings fell 8% in fiscal 2016, increased 3.6% in fiscal 2017 and we forecast a 7% decline in fiscal 2018--not an inspiring track record.”

Guidance for fiscal 2019 was confirmed to be in line with market expectations. Consensus estimates for fiscal 2019 are cash NPAT of AUD 1.09 billion and fully franked dividend of AUD 73 cents per share, or cps. Our unchanged forecasts are cash NPAT of AUD 1.06 billion and total dividends of AUD 78 cps. Management confirmed the external operating environment has been tough, with natural hazard costs above internal allowances, investment market volatility and unforeseen regulatory costs impacting the group’s fiscal 2019 performance. No change to our AUD 14.50 fair value estimate and at current prices, the stock is fairly valued trading 6% below our valuation.

Market speculation on Suncorp Bank abounds, and whether it might merge with a regional bank peer or even be taken over by a large foreign bank. We do not think Suncorp Bank would be a good fit as a merger partner for either Bank of Queensland or Bendigo and Adelaide Bank. A foreign takeover is a possibility, but in our view unlikely. We wait for direction from the new CEO and Board, but we think the future of the bank is in the Suncorp Group. We expect fiscal 2019 earnings will be lower than fiscal 2018, and if achieved, the outgoing CEO will have delivered negative earnings growth for four out of the past five financial years. It is too early to gauge what and how the new CEO will change the current strategy, but we think the group’s multichannel distribution capability will survive.

Well-respected CFO Steve Johnston has been promoted to Acting CEO, and we expect he will be appointed to the role on a permanent basis as soon as an executive search completes. Cameron will stay on in advisory capacity till Aug. 9, 2019, departing following the release of fiscal 2019 results on Aug. 7, 2019. If achieved, the business improvement program benefits will be a great outcome for shareholders, and our previous scepticism was not warranted as the group is moving ahead with limited business disruption. Suncorp is making good progress on the execution of the business and marketplace acceleration strategies. Acting CEO is well placed to cope with the challenging operating conditions. The outgoing CEO has driven a transformation strategy around digitalisation, an enterprisewide focus on customers, products and brands.

We forecast an underlying insurance margin of 12.3% in fiscal 2019 increasing to 14.2% in fiscal 2023. Improvement in the underlying insurance margin is likely but any improvement is both necessary and coming off a low base, with 10.6% reported for fiscal 2018. We like the commitment to return future surplus capital to shareholders and the high dividend payout. We forecast an ROE of approximately 9% in fiscal 2019 increasing to 11.3% in fiscal 2023. We forecast healthy EPS growth from fiscal 2019 onwards. Despite the change in CEO, we expect further improvements in underlying profitability and dividend to boost shareholder returns. The expected uplift in performance is coming from improved customer experience, operational efficiencies and broader customer relationships. An overarching goal is to embed a culture of continuous improvement across the organisation. Strategy execution is the key risk to delivering good business momentum and any mis-steps will detract from our forecast earnings growth.