Suncorp downgraded to hold

Suncorp (ASX: SUN) has been cut by Deutsche Bank from buy to hold and share prices have responded with mild sell-offs in early trade this morning. Down nearly 1%, the rating would take into account the shares 60% rise in the past 12 months which has resulted in a P/E of 24.

After significant gains in its first half of FY13, investors are holding out for a share price reminiscent of the days before the GFC, when its share price was sitting above $20.

However, investors hoping for a significant profit increase for the full FY13 may be bitterly disappointed since the company’s sale of $1.6 billion of bad debt to Goldman Sachs resulted in an approximate $490 million net loss. However, this will lift a weight off the company’s shoulders and it can now focus on improving its offering of diversified insurance products and growing the core bank through retail, agricultural and SME loans.

The company has also undertaken significant restructuring aimed at lowering costs by sending jobs overseas.

Suncorp’s insurance products, through brand names like AAMI (which underwrites, APIA, GIO, Suncorp, Vero and Shannons, are highly profitable. It derives 65% of revenues from its general insurance products and since it, like Insurance Australia Group (ASX: IAG), has encountered a ‘benign’ year of natural weather events, profits have grown strongly.

Foolish takeaway

In the short term, Suncorp shares have investors’ expectations weighing in on them and are not particularly cheap. In the long term the stock could likely outperform the market, especially if it experiences a low number of insurance payouts.

Suncorp will release its full-year results on August 21 but in the meantime, discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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