Suncorp Feeling the Burn

Insurance giant Suncorp Group Ltd is feeling the burn today ending the day over 6% to $11.35 a share.

This was due to one of the top brokers in Australia downgraded their recommendation on the company due to the inherent risks that their business faces from climate change.

A catastrophe insurer has to take into account the effects of climate change despite the cost. When conducting their analysis on this space Morgan Stanley cut its price target for Suncorp with an “underweight” rating, according to the Australian Financial Review.

In their analysis Morgan Stanley stated:

“Investors have been discounting climate change and CAT risks as cyclical for insurers, but we think they are structural as our new analysis shows.

Consensus ratings are heavily OW [overweight] on both SUN and IAG, leaning on both stocks being cheap because they have de-rated in the past three years, and also ascribing the ongoing over-runs on CAT costs as cyclical one-offs or sheer bad luck.

We would say that just because SUN and IAG have de-rated recently, does not mean that SUN and IAG are cheap enough.”

The Suncorp share price has de-rated by around two times price-to-earnings (P/E) points to circa 14 times consensus P/E. The IAG share price shed around 3 times P/E points to 15 times consensus. But despite the big sell-off today, there is further downside risk to the Suncorp share price, according to Morgan Stanley.

On top of all this, Morgan Stanley also lowered its 12-month price target on Suncorp to $10.50 from $12.50 a share. This means that Suncorp must fall another 9% before reaching fair value.

As a point of comparison, the IAG share price was also downgraded. Morgan Stanley cut its 12-month price target to $3.70 from $4.05 a share. Comparatively though, IAG’s performance is stronger due to the “equal-weight” recommendation that was maintained on their shares.