The market is warming up to Suncorp Group Ltd's (ASX: SUN) full year result with the stock bouncing back into the black after suffering early falls.
Shares in the insurance and banking group slipped 1.5% to $14.11 at the open on profit taking as its 55% surge in net profit was largely in-line with market expectations and failed to surprise on the upside.
But the stock staged a turnaround to jump 1.7% to a three-month high of $14.58 as investors soon realised that Suncorp is well placed to meet or beat consensus forecasts of a 16% lift in net profit for the current financial year.
Earnings growth for 2015-16 will be bolstered by further cost savings of $265 million from its "simplification initiatives" that have already shaved $225 million off its cost base in 2014-15, and a normalisation of natural disaster claims.
The previous year was Suncorp's worst year for natural hazard event claims. These claims surged to $1.07 billion, which is nearly double what the group had budgeted.
This meant its general insurance business had to book a 25.2% drop in net profit to $756 million, although we should see a nice rebound in 2015-16 unless we get a number of wild weather events. General insurance is the largest profit contributor to Suncorp.
But Suncorp's other divisions, which include banking and life insurance, posted good growth that was enough to see the group deliver a net profit of $1.13 billion for the year ended June 30, 2015, up from $730 million in 2013-14.
Management also declared a final dividend of 38 cents a share to take its full year ordinary dividend to 76 cents a share, or 1 cent ahead of last year, and said it will pay a special dividend of 12 cents a share.
Suncorp has also managed to settle a dispute with its reinsurers that relate to its 2011 catastrophe reinsurance program. The impact of this dispute has been reduced to $20 million after tax from $118 million and management said it has purchased additional reinsurance cover for 2015-16 at "favourable terms" relative to 2014-15.
The stock looks good value to me even though it has jumped nearly 10% over the past three months as it is sitting on a consensus price-earnings (P/E) multiple of under 14x for the current financial year.
This puts the stock at the low end of its five-year P/E range and its forecast dividend yield of around 8.5% (when franking credit is included) should lend additional support to the stock.
While management has not provided earnings guidance for the current financial year, it has indicated that it will achieve close to $100 million in additional cost savings on a net basis in 2017-18 and can achieve a sustainable return on equity of at least 10%.