Category: Expert Insights
Expert Insights is a collective gallery of knowledge and information packed articles/ blogs/ podcasts from the Industry Captains as well as the Sr. Research Analysts from our team.
Business Strategy and Outlook:
There are positive signs for the future of Suncorp and perhaps early validation of management’s strategic investments though. Australian gross written premiums, or GWP, increased 5%, with the insurer benefiting from premium rate increases as well as growth in policy numbers. In New Zealand, increases were even larger, with GWP up 14%. Improved digital sales and service capabilities, including claims lodgment and tracking, should bring cost savings and improve the customer experience. Lifting marketing of key brands and simplifying product offerings are also likely helping. Cost inflation in home and motor insurance in the mid-single digit percent range has so far been offset by rate increases and further negated by work the insurer is doing to manage costs. Tools to better allocate work to builders and benchmark repair costs are examples.
Suncorp has a point with areas government should focus on. Improve public infrastructure, provide subsidies to improve resilience of private dwellings, address planning laws and approval processes, and remove inefficient taxes and charges on insurance premiums.
Financial Strength:
Suncorp has a track record of returning surplus capital to shareholders via special dividends and share buybacks. The fully franked final dividend of AUD 23 cents is down from AUD 26 cents per share last year, with the payout ratio at the top end of the 60%-80% target range. Home loans grew at an annualised rate of 5.3%, but net interest margins, or NIM, tumbled 12 basis points to 1.97%. Growth in premiums and home loans have come at cost. Operating expenses increased 5.8% as Suncorp ramps up spend on digital initiatives and marketing, and insurance commissions grow with premiums. Digital sales made up 38% of Australian insurance sales in the half, up from 33% in first-half fiscal 2021, with some brands already at 50%.
Company Profile:
Suncorp is a Queensland-based financial services conglomerate offering retail and business banking, general insurance, superannuation, and investment products in Australia and New Zealand. It also operates a life insurance business in New Zealand. The core businesses include personal insurance, commercial insurance, Vero New Zealand, and Suncorp Bank. Suncorp and competitors IAG Insurance and QBE Insurance dominate the Australian and New Zealand insurance markets.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook
New Jersey Resources remains primarily a regulated gas utility even as it invests heavily in nonregulated energy businesses such as solar and natural gas midstream. NJR’s regulated utility business will continue to produce more than two thirds of earnings on a normalized basis for the foreseeable future as New Jersey’s need for infrastructure safety and decarbonization investments provide growth opportunities.
NJR’s constructive regulation and customer growth has produced an impressive record of earnings and dividend growth. The expected NJR’s regulated distribution utility can grow earnings 6% annually based on 1% customer growth and planned infrastructure investments. NJR’s clean energy business should grow even faster, leading to consolidated earnings growth near the top half of management’s 7%-9% annual growth target.
New Jersey’s historically constructive regulation allows NJR to support a high payout ratio and dividend growth in line with the utility’s earnings growth. That regulatory support was confirmed in November 2021 when regulators approved a settlement that raises rates to account for NJR’s infrastructure investments and maintains its 9.6% allowed return on equity from NJR’s 2016 and 2019 rate cases. Although this allowed ROE is lower than other utilities, NJR enjoys other rate mechanisms that support good cash flow generation.
NJR’s gas distribution business faces a potential long-term threat from carbon-reduction policies. To address that threat, NJR plans to invest $850 million in its solar business in 2022-24 and pursue hydrogen and renewable natural gas projects. These projects support aggressive clean energy goals in New Jersey and other states. NJR’s $367.5 million acquisition of the Leaf River (Mississippi) Energy Center in late 2019 paid off big in early 2021 when extreme cold weather allowed NJR to profit from its gas in storage. However, don’t expect windfalls like this to continue as management derisks its energy-services business, reducing the earnings sensitivity to volatile gas prices, basis spreads, and winter weather.
Financial Strength
NJR has maintained one of the most conservative balance sheets and highest credit ratings in the industry. We don’t expect that to change even with its large capital investment plans. The is forecast an average debt/total capital ratio around 55% and EBITDA/interest coverage near 5 times on a normalized basis after a full year of earnings contributions from its midstream investments. Management has a history of using large cash inflows during good years at its non-utility businesses to offset equity needs at the utility. NJR’s $260 million equity raise in fiscal-year 2020 will primarily go to fund the Leaf River acquisition and midstream investments. We don’t expect NJR will need any new equity through at least 2024. In mid-2019, it issued $200 million of 30- and 40-year first mortgage bonds at interest rates below 4%, among the lowest rates of any large U.S. investor-owned utility at the time. It has raised two low-cost green bonds to support solar investments. Up until 2020, NJR had been able to avoid issuing equity in part due to cash it has collected from its unregulated businesses. Extreme winter conditions in 2014 and 2018 provided a timely source of cash ahead of NJR’s uptick in utility and midstream investments. The success of the nonutility businesses and divesture of the wind investments also brought in cash to fund what is expected will be more than $2 billion of investment in 2022-24 without new equity. NJR’s board took a big step by raising the dividend 9% to $1.45 per share annualized in late 2021. The expected dividend growth to follow at least in line with earnings now that NJR has reached a pay-out ratio near 65%, which is reasonable for a mostly regulated utility.
Bulls Say’s
- NJR’s customer base continues to grow faster than the national average and includes the wealthier regions of New Jersey.
- NJR raised its dividend 9% for 2022 to $1.45 per share, its 26th consecutive increase. It is expected that streak to continue.
- NJR’s distribution utility has received three constructive rate case outcomes and regulatory approval for nearly all of its investment plan since 2016.
Company Profile
New Jersey Resources is an energy services holding company with regulated and nonregulated operations. Its regulated utility, New Jersey Natural Gas, delivers natural gas to 560,000 customers in the state. NJR’s nonregulated businesses include retail gas supply and solar investments primarily in New Jersey. NJR also is an equity investor and owner in several large midstream gas projects.
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
