In this section we look at one stock that we think investors should avoid. The risks are now to the downside and we believe investors should consider investing else where. As usual we give this stock the unconventional assessment.
Suncorp (SUN) – It’s been a bumpy ride for those that have held SUN since the start of last year. At the start of January 2017 shares were trading at around $13.52. By July they hit $15.24 (+12.72%). Today they’re back to where they were a year ago at $13.62. Great. SUN just can’t seem to catch a break. Its rivals such as Insurance Australia Group (IAG) and Challenger Group (CGF) have all posted ripping profit results and rosy guidance forecasts. SUN on the other hand, is constantly bogged down with bad luck and oversized hazard claims. Or maybe they are just bad at forecasting the future.
An onslaught of flooding, storm and hail damaged over the last half year caused SUN a lot of grief. The main event was the December 2017 storms in Melbourne that really put a dent in costs. So much so that they will impact its FY18 results. With wild wind gusts of up to 117km/h, trees fell and blackouts hit some 100,000 Victorian homes. SUN is now expecting the damage bill at around the $160m-$170m mark. That stems from 21,000 claims across AAMI, GIO, Suncorp, Apia, Shannons and Bingle relating to both home and motor damage. It equates to a cool $70m over budget. Of course the ones that pay in the end are policy holders who risk higher insurance premiums and shareholders who cop the downgrades.
Unconventional View: Insurance is risky business, we know. The thing that concerns us is that SUN seem to under budget all the time. In-fact according to media sources, SUN has blown its natural hazard claims allowance 10 of the past 11 years. SUN is that careless teenage child that doesn’t know how to budget. IAG on the other hand, almost as bad with 9 of the past 11 years. What concerns us, is that SUN has already blown its budget less than halfway through the summer. It’s a little concerning. With global warming and what not, weather events seem to be happening all the time and SUN hasn’t caught onto it. Not only was it hit by storms in Melbourne, but also in Toowoomba, Newcastle, Lismore, Bundaberg and Grafton last year. The scary part is that we’ve still got a whole summer left of bush fires and possible tropical cyclone activity in Queensland. SUN is now tipping its total natural hazard claim in Australia and New Zealand to be in the range of $406m-$416m which is $60m-$70m above budget. The way things are going, if there are any more unprecedented storms it will bust this budget again.
For that reason, we think SUN is a sell. We’re rather uncomfortable with SUN’s management and the sector as a whole. The only positive, is the potential sale of SUN’s life insurance unit. From what we can see, there are a few parties jostling for the division. Chinese private equity firm Fosun recently joined the competition in a battle that’s shaping up to a bitter battle to the end. The heavyweights interested in the unit are Fosun, Japan’s Dai-ichi Life and US group AIG. It should nett SUN about $1.50bn. Indicative bids were received by Suncorp’s advisers Luminis Partners and Nomura on November 30. SUN also launched its first discovery store, which is supposed to be a retail focused Apple type of super store that offers SUN products, free wi-fi and coffee. Great idea in theory. The Pitt St Mall store is now open. It spans two stories and is built around an amphitheatre. We’re assuming it will be used for workshops and talks. Apparently SUN is pumping $100m into the project. It’s a very risky move. It could pay off or it could be just throwing more money down the drain. The AFR nailed it perfectly by saying the project was “a distraction to the main game which is running an insurance business”. And we think that’s true. There is a risk this project could attract customers that aren’t really interested in insurance.
On the StockOmeter, SUN rates quite poorly. It comes in at 51, which isn’t really a buy. It’s borderline. Why? Firstly its lowish ROE is falling. Which means the company is becoming less profitable. EPS growth is negative and its yield is quite high. That’s a recipe for a dividend cut. On the chart the stock is in a longer term uptrend but in the shorter term looks to be falling back towards its support line. We advise investors Sell while the stock is at its current levels. Any further disappointments could see SUN fall through its support line and track a lot lower.