Reporting Season Highlights – Week 1

We recap some of the profit reporting season highlights from last week including Insurance Australia Group (IAG), Commonwealth Bank (CBA), QBE Insurance Group (QBE) and Breville Group (BRG).

IAG pre-released its FY20 result in a trading update on 24 July. There were thus few surprises in today’s disclosures that featured: (1) 1.1% GWP growth adversely impacted by FY19 business exit, lower CTP pricing and modestly negative COVID-19 impact; (2) reserve strengthening in Australian commercial long tail classes; (3) 16.0% underlying margin with the half year decline due to higher reinsurance costs, lower investment returns and some Australian commercial long tail portfolio performance deterioration; (4) cash NPAT of $279m; and (5) cancellation of the FY20 final dividend. Given “heightened uncertainty” in claim development arising from uncertain economic and operating conditions, IAG has guided to “negligible prior period reserve movement” in FY21 and zero reserve releases in the foreseeable future.

We have lowered medium term GWP growth expectations by 1% given ongoing COVID-19 impacts and have increased claims by 1% as we head into a possible La Niña event (greater incidence of storms, floods, hail, tornado and cyclones). Net of better investment outcomes, changes to our cash NPAT forecasts are: FY21 nil; FY22 -3%; FY23 -5%; and FY24 -5%. IAG’s valuation/price target is thus lowered by ~5% to $5.60 and its Hold rating is unchanged.

CBA’s FY20 result components include $9.63bn statutory NPAT (BP $9.45bn), $7.30bn cash NPAT (continuing) (BP ~$7.65bn), 413¢ cash EPS (continuing) (BP 433¢), 98¢ final dividend (BP 20¢) fully franked, 2.07% NIM (continuing) (BP 2.10%), $2.52bn/33bp GLA loan impairment expense (BP ~$2.88bn/37bp) and 11.6% CET1 ratio (BP 11.1%). While cash NPAT (continuing) was ~11% pcp lower mainly due to COVID-19 impacts, we see this as a very solid result despite all the sector headwinds.

Looking past the noise, there were more positives (strong core volume growth, overall net interest income, cost management, asset quality, capital, funding and liquidity) than negatives (NIM and non-interest income pressures) in CBA’s FY20 result. Unlike the tale of two halves evident in 1H20, this result was more of a tale of two quarters with lower underlying costs and LIE that more than offset a softer top line in the final quarter. The bank’s interpretation of APRA’s recent capital management guidance is that it should retain at least 50% of statutory earnings in 2H20. This has resulted in a generous 98¢ final dividend (49.95% statutory payout ratio) that is great news for investors. CBA has continued with its DRP although no discount will apply.

We have the valuation and price target unchanged at $78.00 per share after netting the value impact of lower cash NPAT with higher excess CET1 capital. Be that as it may, CBA’s share price has done well in the past three months (up by more than 25% in absolute terms) and a Hold rating (previously Buy) is viewed as appropriate based on a 12-month TSR of ~8%.

QBE’s statutory loss of US$712m was broadly in line with guidance of a ~US$750m loss. While noise in the result was mainly due to COVID-19 impacts (as flagged in its 22 July trading update), underlying performance remains strong given strong premium rate increases and retention rates, improvements in attritional and large individual risk claims ratios across North America, International and Australia Pacific, and ongoing operational efficiencies (ahead of schedule, targeting US$825m run rate net underwriting expenses).

Despite the pandemic, QBE continues to manage capital well (PCA 1.8x, at the top end of its 1.6-1.8x target range).Strong organic capital generation and offshore contributions have allowed QBE to pay an interim dividend of A4¢ (10% franked with a 1.5% DRP discount), a pleasant surprise.

Looking past the current noise and based on its strong underlying fundamentals, QBE appears well-placed to withstand the residual impacts of COVID-19. Operating at the top end of its target PCA range should also enable the insurer to capitalise on emerging organic growth opportunities and participate in inevitable global economic recovery.

Our valuation/price target is increased by 12% to $11.90 – this is after taking into account 3% higher cash profit forecasts, 3-4% higher dividend payments and adjusting SOP component PE multiples for recent market movements. QBE’s rating is thus upgraded from Hold to Buy.

BRG announced underlying FY20 EBIT (pre-AASB 16) of $111.1m, up 14.3% on pcp. We note the underlying result adds back salary reductions & cuts to marketing spend. Notwithstanding the disruption from COVID-19, the result slightly exceeded BRG’s withdrawn guidance (FY20 EBIT pre-AASB16 of ~$110m). Key result takeaways are:

• Strong revenue growth throughout the year across all key markets: BRG’s Global Product segment achieved 20.1% constant currency (cc) revenue growth over the year. Strong double-digit sales continued in 2H20 despite retailers in key regions closing stores with 2H20 cc sales up ~20% after achieving 20.3% growth in 1H20.
• International rollout plan remains on track: BRG’s rollout in Europe continues to progress strongly. The strong cc sales result reflects a strong result in the UK, traction in Germany/Austria (launched in 2H18/1H19) & the Benelux/Switzerland (launched 2H19) and early benefits in Spain (launched 1H20).
• Aside from COVID-19 risks, key swing factors for FY21 include: 1) the need to replenish inventory back to target levels, which may constrain near-term sales and timing of launches into new markets; 2) timing of Amazon Prime Day clashing with Cyber Monday/Black Friday; & 3) the lumpy nature of RoW sales cycling a strong FY20 baseline.

The stronger than expected result increases our FY21/FY22/FY23 EPS by 8%/3%/0% and our PT increases to $26.00 (previously $23.00). We have a positive view on BRG on several fronts: growth prospects in several large markets, flexible cost structure & strong balance sheet. However, given the strong share price run, and mindful of near term uncertainties, we believe BRG is now fair-value and downgrade from Buy to Hold.

To learn more about these stocks, speak to your adviser or refer to the Client Access Research Library.

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Disclosures: T S Lim, authoring analyst for Banks & General Insurers, holds a long position in QBE, CBA, CBAPH, CBAPI and IAG.
Bell Potter Securities acted as Co-Manager in CBA’s PERLS XII Capital Notes offer (October 2019) and received fees for that service.