2023-05-15 15:27:46 ET
Summary
- Since my last article, Sun Life has experienced a -0.02% price decline, contrary to the S&P500, up 3.88% over the same period.
- On Friday, Sun Life reported earnings corroborating my expectations of growth from my previous article, reporting $8.94bn in Q1 revenues alongside $610.74mn.
- Although the company has seen a limited amount of margin compression YoY, on a net sales basis, scale has grown 28.63% from Q1'22.
- Such growth comes on the back of both segmented expansion and geographic growth.
- Due to the company's continued operational strength as well as sustained undervaluation, I rate Sun Life a 'buy'.
Sun Life Financial ( SLF ) is a Canadian multichannel insurer and mutual fund operator with operations across North America and the APAC region. The company has pivoted towards scale growth foremost, strategically accessing insurance operations in ASEAN, high-net-worth targets in Hong Kong and Singapore, and expanding a mutual fund footprint in India and China.
Over the past quarter, Sun Life has experienced revenues approaching $8.94bn- up 28.63% YoY- and free cash flow of $212.21mn, up 233.43% from Q1'22.
This supports the thesis I set out in my previous article, where I projected significant scale growth as a product of its geographic expansion as well as the augmentation of its healthcare suite of products across the North America region.
Introduction
Sun Life has centered its long-term corporate strategy around four pillars; becoming a global leader in alternative asset class provisions, leadership in health, wealth, and insurance products in Canada, leadership in health and benefits in the US, and development into regional leadership in fast-growing Asian markets.
Combined with enhanced accessibility through digital products, and the latter pillars feed into the company's overall key priorities of synergistic efficiencies, scaled capabilities and inorganic growth, and an integrated and global health strategy.
Valuation & Financial
General Overview
Over the trailing 3-month period, Sun Life (-5.42%) has faced poorer growth than both the general market, represented by the S&P500 ( SPY ) - up 0.88% - and TradingView's insurance index, up 3.01%.
I believe Sun Life's poorer price action reflects anxieties about bank crisis contagion - to which Sun Life would be more vulnerable than other insurers due to greater activities in asset management and alternative assets - in addition to poorer results from MFS, Sun Life's primary asset management subsidiary.
However, as Sun Life's earnings show, such a decline over the past quarter represents an overreaction from the market.
Comparable Companies
Similar to Canadian banks, Canadian insurers are dominated by large companies with varied interests outside of core insurance offerings; Manulife ( MFC ) is the largest Canadian insurer by market cap, with significant operations in China; the Power Corporation of Canada ( POW:CA ) is a conglomerate with holdings from life insurance companies such as Canada LifeCo to digital brokerages such as Wealthsimple; and Intact Financial ( IFC:CA ), while dabbling in life insurance, principally deals in property and auto insurance.
As illustrated above, in the past quarter, Sun Life has experienced the poorest share price action. In spite of this, the firm maintains multiples similar to or superior to competitors, with a lower-than-median P/E ratio and the lowest P/S ratio among peers.
Moreover, Sun Life maintains a strong ROE and dividend, which I believe ensures solid shareholder returns. Additionally, demonstrating Sun Life's ability to commit to margin growth, in spite of a 5-year revenue decline of -20.72% (as a result of a plethora of black-swan events), the insurer has experienced 50.63% earnings growth, second to none.
And to revert scale decline, as demonstrated by Friday's earnings, Sun Life has laid out a detailed expansion plan.
Valuation
According to my discounted cash flow valuation, at its base case, Sun Life is undervalued by 20%, with a fair value of $60.19, up from its current price of $47.95.
My DCF assumes a discount rate of 8%, reflecting Sun Life's debt-light cap structure and low implied volatility. I additionally expect a continuation of present-day net margins and growth in revenues at a slightly lower than the historic rate to account for increased interest and recessionary pressures.
Alpha Spread's multiples-based relative valuation tool supports my thesis of undervaluation, calculating an undervaluation of 16%, with a fair stock price of $57.34 per share.
Thus, averaging the two values out, Sun Life is currently undervalued by 18% with a fair value of $58.77.
Accelerated Scale Strategy With Long-Term Margin Growth Expectations
In light of the declines in scale described in the 'Comparable Companies' section of this analysis, Sun Life has prioritized a reversion to scale via geographic growth above all else. The firm has become the largest insurance company in the Philippines on a total premium basis, as well as the country's second-largest mutual fund provider. This comes in addition to growth across the APAC region in all insurance, bancassurance, high-net-worth wealth management, and mutual funds across China, Indochina, and India.
In conjunction with this, Sun Life has assumed a leadership position in health and benefits products - a high-margin vertical, with approximate after-tax margins being 9.7%. The firm has become the largest independent medical stop-loss provider and the second-largest dental benefits provider in the whole nation. In Canada, Sun Life remains the largest individual health insurer, group benefits provider and group retirement services provider.
To adequately achieve results - through Sun Life has achieved success with organic growth - the firm has looked to disciplined and profitable M&A activities; for instance, in asset management, Sun Life has most recently acquired Advisors Asset Management. In healthcare, PinnacleCare and DentaQuest. And in Asia, bancassurance partnerships with Dah Sing Bank and Asia Commercial Bank have driven the growth of the newest vertical.
Wall Street Consensus
Analysts largely echo my positive view on the company, estimating an average one-year price increase of 12.22% to $53.81.
Even at the minimum projected price of $45.48 - a decline of -5.16%, there is low volatility - especially considering overall financial services sentiment.
Risks & Challenges
Interest & Spread Risk
As interest rates are maintained at a heightened level, there is increased potential for financial loss as said rates are conducive to reductions in AUM value and reductions in demand for Sun Life products. Although investments in inelastic products remedy this, Sun Life's mutual fund business in particular faces risk.
Strategic Expansion Risk
Sun Life seeks to expand aggressively across both geographic and segmentation arenas. Though this may support scale growth, it has evidently (as seen by recent earnings) compressed margins in order to attract consumers, particularly in less affluent Asia markets. The firm has positioned itself for wealth growth in Singapore and Hong Kong, but such action may not be sufficient to address potential reductions in operating cash flows.
Poor M&A Execution Risk
While Sun Life has successfully executed a series of M&A transactions over the past decade, poor selection of acquisition targets, excessive dependence on inorganic growth, or high cost of acquisition - particularly with higher interest rates - can harm the company's balance sheet and cash flows.
Conclusion
In the short term, I expect Sun Life's stock to rally due to positive sentiment from earnings.
In the long term, I project that Sun Life's scale and margin expansion strategies will yield success and position the company to capture maximal growth.
For further details see:
Sun Life: Sustained Strategic Growth As Previously Projected