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Earnings wrap: CBA, Suncorp and AMP

Lex Hall  |  09 Aug 2019Text size  Decrease  Increase  |  
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Commonwealth Bank remains fairly valued in Morningstar’s eyes and maintains an attractive fully franked dividend yield of 5.5 per cent, despite a hit to profits caused in part by the fallout from the royal commission.

Australia’s largest lender (ASX: CBA) has reported a slightly softer than expected fiscal 2019 result amid higher operating expenses.

The 4.7 per cent fall in cash profit to $8.5 billion was modestly below Morningstar’s forecast and consensus.

Morningstar analyst Nathan Zaia says the bank’s reputation has been tarnished by a spate of compliance shortcomings, which came to light in the Kenneth Hayne-led royal commission.

The profit drop is primarily due to announced $714 million of pretax customer remediation costs.

However, wide moat CBA remains fairly valued, according to Zaia, whose fair value estimate for the bank is unchanged at $80.

Zaia remains positive on the bank’s outlook, citing a robust balance sheet, dominant market positions, strong profitability, organic capital generation, sound loan book and high returns on equity.

“Despite the lower profit, our long-term positive view on Australia’s biggest bank is intact,” Zaia says.

“We have reduced short-term forecasts to account for lower noninterest income and higher operating expenses, pushing our fiscal 2020 cash NPAT down 6 per cent.

“However, our longer-term forecasts are largely unchanged, as is our $80 fair value estimate. At the current price, Commonwealth Bank is fairly valued.

“A key attraction remains the fully franked dividend yield of 5.5 per cent, grossing to an attractive 7.8 per cent. We do not foresee any issues with the bank being able to maintain the current annual dividend yield of $4.31 per share next year, implying an 85 per cent payout ratio.”

 Full analyst report: Messy FY19 result but Commonwealth Bank's fundamentals still sound

Suncorp’s acting CEO seeks to right the ship

Suncorp’s move to appoint Steven Johnston as acting CEO is smart but it should have been done earlier, says Morningstar.

Johnston made a good start with a better than expected fiscal 2019 cash profit of $1.1 billion, slightly up on Morningstar’s forecast of $1.06 billion forecast.

He also conceded Suncorp’s (ASX: SUN) “marketplace strategy” – a push to be the “Amazon of financial services” – had only confused customers. It has abandoned this and is refocusing on its bread and butter: banking and insurance.

Morningstar analyst Nathan Zaia applauds this move. He has made only minor changes to his earnings forecasts and leaves intact the fair value estimate of $14.50. At $13.32, the stock is fairly valued, trading around 8 per cent below his valuation.

The key business unit is the Australian insurance operation reporting $588 million fiscal 2019 cash NPAT, or 51 per cent of group total. Zaia notes cash NPAT fell 14 per cent from a year ago due primarily to higher claims costs, up 8 per cent to $5.45 billion as expensive natural peril events took a toll.

He says the company’s longer-term financial targets can be met but probably not for a few years.

“Targets include boosting the insurance margin to at least 12 per cent, currently 10 per cent for the key Australian operation. The group target return on equity of at least 10 per cent is not achievable in fiscal 2020, but we think it can be met by end fiscal 2021.”

Zaia forecasts a flat fiscal 2020 result compared to fiscal 2019 but think the group will make good progress from here, and forecasts strong EPS growth in fiscal 2021-24 to average about 10 per cent.

“Despite some concerns, the stock is an attractive dividend payer with a 5.3 per cent forecast yield for fiscal 2020 and 5.9 per cent in 2021.

"We expect the unsustainably high fiscal 2019 payout ratio to decline to 85 per cent in fiscal 2020 and 83 per cent in 2021, with the ordinary dividend expected to stay flat at 70 cents per share in 2020 and increase to 79cps in 2021."

 Full analyst report: Suncorp's acting CEO making logical move

AMP’s fair value raised as market applauds raising

Morningstar has increased its fair value estimate for embattled financial giant AMP after the group offloaded its life insurance business and staged a successful capital raising aimed at revamping its strategy.

Morningstar analyst Chanaka Gunasekera has increased his fair value estimate for narrow moat AMP Limited to $1.95 per share from $1.80 following first-half 2019 results, underpinned by a strong performance from AMP Capital.

The market appears to have welcomed the raising: AMP (ASX: AMP) is up more than 8 per cent in Friday trading.

AMP Capital is also set to become a bigger contributor to group earnings under management’s new strategy.

Gunasekera says the just completed $650 million institutional equity raising at $1.60 per new share provides the balance sheet capacity to immediately implement the strategy.

AMP's stock has lost more than 70 per cent of its value in the past three years following a series of scandals, including charging life insurance premiums to dead clients and other ongoing compliance concerns.

The group will hold an institutional placement and share purchase plan to pay for a $1.3 billion, three-year transformation program.

That program will not include its life insurance business, which it has agreed to sell to the UK's Resolution Life in a revised deal worth a reduced $3 billion.

AMP will also provide retail investors the opportunity to acquire shares at the same price of $1.60 per new share (or lower) via a share purchase plan, or SPP, next week.

“Although we expect continued disruption in AMP’s wealth management division, or AWM, and lower earnings growth from AMP Bank, we think these headwinds are now priced into the stock. Accordingly, we recommend participating in the SPP,” says Gunasekera.

AMP Capital remains the jewel in the group’s portfolio of businesses, he says.

“We forecast AMP Capital to generate underlying NPAT of $210 million in 2019, 21 per cent higher than 2018 and be the group’s major earnings growth driver in the future.

“The business posted a very strong 2019 half-year result, with underlying NPAT of $123 million – 28 per cent higher than the 2018 half-year.

However, Gunasekera expects lower earnings in the second half due to seasonally lower performance fees and higher employee expenses as AMP invests to grow the business.

“The earnings were primarily driven by higher earnings from its externally sourced funds, which invest in real assets, particularly infrastructure that garner higher margin revenue.

“There appears to be continuing strong momentum in its externally managed infrastructure AUM.  AMP Capital is also continuing to expand its global footprint, with AUM on behalf of direct international institutional clients increasing to $18.8 billion at 30 June 2019, from $17.3 billion at 31 December 2018.”

Other companies reporting this week

Morningstar reporting season calendar

Morningstar has compiled a list of more than 100 companies that will release earnings results during the August Reporting Season.

We'll update this list daily with links to research notes from our Morningstar equity analyst team.

View the calendar

is content editor for Morningstar Australia

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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