Counting Down the Days
Shares in financial group, Suncorp (ASX:SUN) have had a strong run as the rate hike cycle went full swing. Another tailwind for the group is the progress with the ongoing $4.9 billion ANZ deal for its regional banking arm where both parties overcame a very important hurdle: securing Queensland government support in exchange for promises of employment and a binding headquarters arrangement.
Despite this development, we do believe that Members without exposure to Suncorp (ASX:SUN) would be well served to take some caution given that there is still some massive uncertainty on the ACCC’s (Australian Competition and Consumer Commission) final decision which should be due out on 28th July.
In the interim, while count down the days till the ACCC makes the call, we adjust our rating on Suncorp (ASX:SUN) down to a HOLD in the meantime. We will revisit this rating after the ACCC provides their final determination at the end of July.
To be clear, we continue to like Suncorp, especially given the more favourable insurance trends in the near term and the fact that the group is entering the final stages of the three-year plan to push growth and optimise the business (via cost cutting and streamlining customer service).
Turning to the charts, SUN has steadily been grinding higher since pandemic lows as the insurer rides the wave of rising interest rates – a big plus to the bottomline as this would lead to higher investment yields. We do notice that recent price action, on both daily and monthly charts, reflect easing bullish behaviour and this likely due to the market waiting out the ACCC’s decision but also the fact that the shares did see a strong rebound marking a clear possibility of profit-taking occurring.
From this vantage point, SUN will likely trade in a consolidation until the end of July with the likely price levels between ~12 to ~14 – unless there is a clear catalyst from other external factors such as the RBA’s next meeting in early July or potential claims scenarios.
What’s new?
Last Friday, ANZ and Suncorp (ASX:SUN) cleared a very important hurdle for the sale of the latter’s banking division. According to media reports, both parties have secured Queensland government support in exchange for the promise of creating more jobs in the state and a binding agreement to keep headquarters and insurance division to stay in Queensland.
From our point of view, agreeing to the terms is a no-brainer for Suncorp (ASX:SUN) given its scale in the state not to mention the fact that Queensland does have a considerable pool of talent given other insurers are based there as well.
The only hurdle left, in our view, is the possibility that the ACCC may still rule against the merger of Suncorp’s banking division with ANZ on grounds that the outcome would result in less competition. We don’t believe this to be likely given that the Big Four banks will continue to compete at the same level for consumer business as ANZ won’t magically outsize and outcompete the others post-merger.
After all, should both regional banks combine, it doesn’t result to such a meaningful scale while there are also integration hurdles (people-wise, process-wise and especially tech-wise) for the post-merger entity to deal with. Competition may, in fact, intensify and benefit the consumers.
In any case, should the ACCC block the merger then the two parties still have one more ace in hand: Federal Court. There is a precedent if one were to look at the development between the TPG and Vodafone merger a few years back where the ACCC was ultimately overturned by the Court.
Ultimately, regardless of the direction of the deal, we continue to like Suncorp (ASX:SUN) given the tailwinds in the general insurance market: (i) robust renewal premium rate increases that the market readily absorbed, and (ii) benefit of higher investment yields due to RBA rate increases. There is also an increasing likelihood that claims, particularly COVID-related, will diminish in the next fiscal year which should further increase margins – an outcome that will boost dividends. On that note, there is a clear possibility of a capital return post-bank sale which should further add to the yield.
