Credit Suisse analyst Mike Rizvanovic thinks Sun Life Financial Inc.’s US$2.48-billion acquisition of oral health provider DentaQuest is “solid,” touting the addition of a “high-quality earnings stream” and seeing management’s expectations stemming from the deal as “conservative.”
“We see further potential upside to management’s targeted expense synergies of US$60-million given the large scale being added to SLF’s existing platform, while potential revenue synergies, which are not included in guidance, may provide even more upside from the acquisition,” he said. “Particularly compelling are the benefits that can potentially be extracted from SLF’s national distribution capabilities.”
“Dental insurance is a compelling business for SLF to grow in given its low capital requirements, its modest reserve levels, and its general lower volatility earnings stream, which can generate an ROE of more than 30 per cent. Also notable is DentaQuest’s strong growth in recent years (14-per-cent CAAGR since 2018 vs. a 6-per-cent industry average) that has been driven by program expansion and execution on winning new contracts (typically multi-year state contracts).”
Seeing the acquisition price as “reasonable, but certainly not cheap,” Mr. Rizvanovic is now projecting 2022 earnings per share of $6.62, up from $6.47. That led him to raise his target for Sun Life shares to $74 from $72 with an “outperform” recommendation (unchanged). The average is $72.50.
“The purchase price and targeted 2024 incremental earnings contribution on a fully synergized basis results in a PE multiple of 13.7 times on the transaction,” he said. “However, adjusting for the amortization of intangibles, which SLF includes in its definition of underlying earnings (10 cents per share), suggests a much higher PE multiple of 18.5 times. While not inexpensive, we do believe that the deal represents a strong use of excess capital at the holding company level, which even after the transaction closes will still have cash resources of more than $1.0-billion.”
Elsewhere, CIBC World Markets analyst Paul Holden raised his rating to “outperformer” from “neutral” with a $74 target, rising from $72.
“While we continue to value SLF at 11-times forward earnings, there are an increasing number of reasons to argue for a higher multiple over time,” said Mr. Holden. “The DentaQuest acquisition enhances these arguments as it is capital light, high return, has high cash flow conversion and strong growth tailwinds. With this acquisition, and in consideration of a lagging share price over the last six months, we are upgrading SLF.”
Other analysts making target changes include:
* BMO Nesbitt Burns’ Tom MacKinnon to $76 from $75 with an “outperform” rating.
“Its on strategy, immediately accretive, adds scale in U.S. employee benefits, diversifies revenue stream, and significantly adds capabilities in the capital-light dental business,” he said. “At 13.7-times earnings with cost synergies and an estimated 19 times without, it wasn’t cheap, but with attractive funding (60-per-cent debt/40-per-cent cash) it is immediately 3-per-cent accretive to underlying EPS. 2022 underlying EPS increases by $0.09 reflecting expected H1/22 close.”
* National Bank analyst Gabriel Dechaine to $73 from $71 with an “outperform” rating.