Sun Life Financial Inc.
Good quarter, good capital, good outlook, easy upgrade
Our view: While Q1/23 results were weaker than we forecast in Wealth Management and Corporate, core earnings in the other segments were above our expectations. We model the Wealth business to improve from here with good growth almost everywhere. SLF had the highest ROE among peers this quarter (with pretty much the highest capital) and also has the highest medium-term ROE target. We think its earnings volatility is comparatively low with higher than average earnings growth, leading us to use the highest valuation multiple in our coverage. We up our estimates and target price and upgrade to an Outperform rating.
Key points:
SLF's Q1/23 core EPS was $1.52, close to our estimate and consensus. The Canada, U.S., and Asia segments had stronger earnings than we expected. SLF announced a $0.03 per share increase to its dividend per common share to $0.75, in line with our estimate.
We introduce our 2024 and 2025 estimates in our model, which we rebuilt under the IFRS 17 drivers of earnings analysis. Our underlying EPS estimate moves to $6.80 (was $6.47) in 2023, $7.55 in 2024, and $8.15 in 2025. For BVPS (including AOCI), we forecast $38.49 (was $38.37) in 2023, $43.00 in 2024, and $47.85 in 2025. We increase our price target to $79 (was $76).
SLF's underlying ROE of 17.3% this quarter was the strongest among peers, higher than the peer average of 14.5%. SLF reaffirmed its underlying ROE target of 18%+ in the medium-term, the highest underlying ROE target among the Canadian lifecos, and the Q1/23 high ROE was achieved with a very high capital ratio. While investment performance bears watching (with a focus on commercial real estate and the potential for credit losses), this was a good quarter to remind us that business mix is favourable with good growth prospects with in theory, low volatility relative to peers.
The Q1/23 total LICAT ratio at the holding company level was 148%, the second highest ratio among peers this quarter. SLF disclosed that it has $1.1 billion in cash held at the holding company. SLF plans to continue prioritizing dividends and organic growth, and pursue M&A opportunities if they meet the lifeco's financial targets. Buybacks are considered based on the M&A pipeline.
SLF is trading at a P/B multiple of 1.84x, above its historical average and peer average of 1.37x. On a P/E basis, SLF is trading at 9.6x, below its long- term average of 11.0x but above the peer average of 9.2x. This is the first quarter we are seeing under IFRS 17, so we note that consensus estimates (and our own) could have more estimation error than normal. SLF's stock has underperformed peers this year, yet its fundamental earnings performance very much outperformed peers this quarter and in our view, we think this type of outperformance can continue all else equal.