The Suncorp Group Ltd (ASX: SUN) share price is outpacing the broader market after it sold its interest in a…
The post Suncorp (ASX:SUN) share price bucks market downtrend on ~$84m divestment appeared first on The Motley Fool Australia. –
The Suncorp Group Ltd (ASX: SUN) share price is outpacing the broader market after it sold its interest in a JV and announced a FY22 reinsurance placement.
The Suncorp share price jumped 0.3% to $11.21 during lunch time trade with the S&P/ASX 200 Index (Index:^AXJO) slumped 0.3% into the red.
Management announced today that it sold its 50% stake in RACT Insurance Pty Ltd (RACTI) to its JV partner, the Royal Automobile Club of Tasmania Ltd (RACT) for $83.8 million.
Suncorp share price lifts on possible capital return
The sale price equates to around a price-earnings multiple of 18.1 times based on the expected FY21 earnings.
Suncorp will book a pre-tax profit on the divestment of $65 million to $70 million. The total capital release is expected to be $50 million.
No word yet on what Suncorp intends to do with the surplus capital and investors will be hoping for some form of capital return. No doubt the Suncorp share price will rally if management handed back some of the cash.
The bank and insurance group last did a capital return in 2019 when it paid 39 cents a share on top of its regular dividends.
Downsizing to upside the Suncorp share price
The sale is consistent with Suncorp’s plan to streamline its business. It said the transaction was in the best interest of shareholders and customers.
“Suncorp and RACT have enjoyed a successful relationship in Tasmania since 2007,” said Suncorp’s chief executive Steve Johnston.
“We have mutually agreed that now is the right time for RACT to take full control of the insurance entity. This is consistent with our focus on simplifying the Group and driving improvement in our core insurance and banking businesses.”
The sale isn’t expected to be completed till late this calendar year and is subject to regulatory approval.
Reinsurance update brings relief
Suncorp also announced that it has placed its FY22 reinsurance program. Reinsurance is like insurance for insurance companies to protect them in the event of a major claim event.
Given the growing incidences of natural disasters linked to climate change, the news is welcomed by shareholders.
The structure of the main catastrophe program remains unchanged from FY21. There is an upper limit of $6.5 billion covering the Home, Motor and Commercial property portfolios across Australia and New Zealand.
Pleasingly, the cost of the FY22 reinsurance program and natural hazard allowance are in-line with management’s guidance. The natural hazard allowance for FY22 is expected to be $980 million and Suncorp’s maximum event retention remains at $250 million.
No unexpected bad news to rock the Suncorp share price here.
Another reason for shareholders to cheer
Investors will also be relieved about Suncorp’s underpayment controversy. The group completed its review into pay and leave entitlements of staff in Australia.
It said it will make remediation payments to current and former employees identified by the review from July 2021.
More importantly, it believes that the $60 million it has set aside in the FY20 results will be enough to cover all costs.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.