Friday, August 01, 2008

Sun Life Q2 2008 Earnings

  
RBC Capital Markets, 1 August 2008

Core Q2/08 EPS of $0.91 compared to $0.96 a year-ago, our estimate of $1.01 and the consensus estimate of $1.00. Net income in the U.S. division was particularly weak, down 47% YoY and 27% sequentially. Net income was affected by a decline in equity markets, the unfavourable impact of interest rate movements and associated hedges, wider credit spreads and credit-related allowances on actuarial reserving requirements, and credit-related losses on asset sales.

We have lowered our 2008E EPS from $4.10 to $3.85 and our 2009E EPS from $4.60 to $4.35 to reflect the Q2/08 EPS shortfall versus our estimates, and some factors that we expect will continue to be a drag on earnings growth, including credit-related items and the impact of prior declines in equity markets.

We now expect a 2% decline in EPS in 2008, well below what the company has delivered in the past and below management's medium term objective of 10% annual EPS growth.

We maintain our Sector Perform rating, but have lowered our 12-month target price from $50 per share to $47 on the back of lower estimated earnings per share.

Sun Life's stock trades at 9.8x NTM EPS, versus 9.9-12.1x for its peers and a 7-year average of 12.3x. We expect lifecos to trade at higher multiples in the medium term, but trading multiples could remain below the 7-year average for some time given the potential negative impact of lower interest rates, deterioration in credit quality, and uncertain equity markets.

The stock looks cheap but it is difficult to see the catalyst for reversal against peers given that the causes of recent relative earnings disappointments remain in place (deteriorating U.S. credit quality and higher credit spreads have been particularly negative relative to the company's Canadian peers). Positively, Sun Life remains highly capitalized, has exposure to large asset management businesses, and has well-positioned domestic group and wealth management platforms.

We are relatively more positive on the stocks of Industrial Alliance and Manulife (IAG.TO, $34.32, rated Outperform, Average Risk; and MFC.TO, $37.72, rated Outperform, Average Risk).
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Financial Post, Jonathan Ratner, 1 August 2008

Sun Life Financial Inc.’s disappointing second quarter results produced a 6% sell-off in its shares on Thursday, and its gloomy U.S. macroeconomic outlook and decision to keep its dividend at 36¢ per share didn’t help much either. This ends a five-year streak of semi-annual payout hikes.

Analysts responded to the news by cutting their price targets and earnings forecasts on the insurer. Andre-Philippe Hardy moved to $47 per share from $50, along with reductions to his 2008 and 2009 earnings forecasts, noting that credit-related items and the impact of prior declines in equity markets will likely drag on future earnings.

“The stock looks cheap but it is difficult to see the catalyst for reversal against peers given that the causes of recent relative earnings disappointments remain in place,” he told clients.

However, Mr. Hardy also noted Sun Life’s high level of capital and exposure to a large asset management business as some of the positives.

Desjardins Securities analyst Michael Goldberg cut his target to $50 from $53.50 and noted that investors will be looking for similar negative credit factors in Manulife Financial Corp.’s results. However, he does not expect any material credit issues will show up in Manulife’s U.S. results, just as there were none apparent in Great-West Lifeco Inc.’s.

“A situation where Sun Life is seen to be the only one of the major Canadian-based lifecos hurt by U.S. credit issues will probably continue to hurt the relative performance of Sun Life’s shares going forward, at least in the near term,” Mr. Goldberg said in a research note.

He also cut his 2008 and 2009 earnings per share estimates, saying the reduction this year is due to macroeconomic factors that produce lower assets under management and fees.
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