After outperforming its peers in 2020 and already up 7 per cent in 2021, RBC Dominion Securities analyst Darko Mihelic sees Sun Life Financial Inc.(SLF-T) possessing “little room for continued outperformance given current valuations.”
Accordingly, in a research report previewing the year for Canadian Life Insurance companies, he lowered his rating for its shares to “sector perform” from “outperform” on Thursday, despite calling Sun Life’s earnings impressive and remaining “positive” on its outlook.
“Year to date, SLF has had the highest expected profit growth of approximately 12 per cent versus a peer average of 4 per cent,” he said. “Asia results have been solid as earnings increased 14 per cent year-to-dateD and insurance sales improved 9 per cent year-to-date despite COVID-19 headwinds. SLF Asset Management earnings increased 10 per cent year-to-date and MFS has reported total net inflows every quarter since Q1/20. We remain positive on the outlook as we forecast good underlying EPS [earnings per share] growth of 11 per cent and relatively high underlying ROE [return on equity] of 14 per cent in 2021. We forecast strong earnings growth in Asia of 13 per cent and in SLF Asset Management of 17 per cent in 2021. We believe the recently announced bancassurance partnership with Asia Commercial Joint Stock Bank (ACB) in Vietnam will support sales and earnings growth in Asia longer term.”
However, Mr. Mihelic thinks “valuations appear elevated on a relative basis,” noting Sun Life shares are trading at 10.1 times his 2021 core EPS estimate, which is “well above” the peer average of 8.4 times and almost 20 per cent above its historical average premium to its peers.
“SLF was the best performing stock relative to peers in 2020 (down 1 per cent versus an average decline of 10 per cent for peers) and has generated positive total returns of 7 per cent year-to-date, above the Canadian lifeco index of 6 per cent year-to-date,” he said. “While we still like the company, we do not see much room for further near-term outperformance.”
With his downgrade, Mr. Mihelic raised his target for Sun Life shares to $69 from $61. The average target on the Street is $63.83, according to Refinitiv data.