Suncorp-Metway Limited (SUN) Review

Suncorp-Metway Limited (SUN) has retained a $15.00 share price target and has a medium risk to buy from Australian stockmarket analysts from Citi.

Suncorp-Metway Ltd: Value Looks Appealing as Guidance Reiterated

Upgrade to BUY, slightly lower EPS — We roll forward our mark to market, and allow for higher bad debt charges and make the following EPS adjustments, FY08E: -5%; FY09E: -1%; FY10E: -2%. With risks seemingly priced in and guidance largely reiterated, we lift our recommendation from Hold, Medium Risk to Buy, Medium Risk, retaining our A$15.00 target price.

Allowance for further losses on corporate bond portfolio — We are now forecasting a FY08E insurance margin at the low end of the 9% to 12% company guidance range as we have allowed for a further A$60m of mark to market losses on the corporate bond portfolio. Suncorp's guidance assumes no deterioration in credit markets from 1 January 2008, whereas there has been some. If such losses still exist at 30 June 2008, it is possible they may be offset by reserve releases, but we have taken them against profit for now.

Personal lines recovery on the cards — While it will take a while to show up in reported numbers, there seem to be good prospects of meaningful premium rates rises in personal lines classes, which should improve profitability in time.

QBE/IAG deal positive — In addition, if the QBE merger proposal for IAG proves to be a success, this would surely be a medium-term positive for Suncorp.

CPS should fix capital shortage — Suncorp's recently announced convertible preference share ("CPS") issue, and an associated tier 2 raising should provide capacity to fund more than A$8bn of assets, enough to keep growth momentum over the next 18 months to two years without further DRP underwriting.