Suncorp-Metway (SUN) has a retained Buy/Medium Risk rating and A$15.00 share price target from Australian Stockmarket analyst Macquarie Research Equities.

Suncorp-Metway (SUN) Ltd: Caution may place DRP underwrite on the agenda

Lower EPS — We lower our EPS forecasts as follows, FY08E: -7%; FY09E and FY10E: -3% to incorporate a higher bad debt charge, partial DRP underwrite, an increase in corporate bond losses to ~A$110m, but partially offset by anticipated reserve releases, and roll forward of our mark to market. We are now forecasting an FY08E insurance margin of 9.0% at the bottom of the guidance range. We retain our Buy/Medium Risk (1M) rating and A$15.00 target price.

ACE at low end but should soon recover — We estimate that Suncorp's ACE ratio at 30 June 2008 is also likely to be right at the bottom of its 4.5%-5.0% target range. But with A$190m of capital to be released from Vero by 31 December 2008, it should soon recover.

These times point to cautious approach — With ANZ and NAB completing DRP underwrites without much adverse reaction, we suspect Suncorp may be tempted to take the cautious route and partially underwrite its DRP once more. We now allow for a 65% underwrite of the next dividend in our forecasts.

Nudge up bad debt charge — We now align our already relatively cautious bad debt forecasts with our banks team's forecasts for other banks, but assuming that Suncorp will incur write-offs at the level of 60%-65% of the majors.

Lower spot valuation — With banks now trading at a lower multiple than previously, we reflect this in our spot valuation, which falls from A$17.00 to A$15.80. We make no changes to our target price which was set at a discount to take account of such risk.