Sun Life Financial Inc. (TSX: SLF) is one of Canada's Big Three life insurance companies along with Great-West Lifeco and Manulife. Sun Life provides insurance, retirement, and wealth management services to individual and corporate customers in Canada, the United States, and Asia. 

Key Highlights:

• Acquisition of DentaQuest: Recently the group announced that it completed the acquisition of the second-largest dental benefits provider in the US: DentaQuest for USD 2.475 billion, enabling the SLF to move ahead strategically in the US to become a leader in the health and benefits. The acquisition is expected to bring in total annual benefits revenue exceeding USD 7 billion to SLF.

• Growing Asset under management: The company reported an increase in the total AUM (Asset under management) of CAD 1,352 billion in Q1FY22, as compared to the AUM of CAD 1,304 billion in Q1FY21. The general fund assets were reported at CAD 196.68 billion in Q1FY22 against CAD 190.07 billion in Q1FY21, whereas the segregated funds ended the Q1FY22 at CAD 133.49 million vs CAD 127.34 billion in Q1FY21. The retail and institutional managed funds show a growth which pushed the total other asset under management segment to CAD 1,021 billion in the reported period (Q1FY22) against CAD 986.83 billion in Q1FY21.

Source: Company Filing

• Highly diversified investment portfolio: The group is holding a highly diversified investment portfolio since a major chunk of the income from the investments is a part of the company’s overall income stream. Approx. 97% of the fixed income is rated as investment grade, giving stability to the investments during the financial turmoil, and only 5% of the fixed income is rated as BBB. The company has strategically repositioned the real estate debt and equity portfolios to increase the durability of the cash flows coming from those investments.

Source: Company presentation

• Dividend play: Recently, the company announced a dividend of CAD 0.69 per common share, payable on June 30, 2022. The current dividend saw an increase of 4.0% as compared to the previous dividend of CAD 0.66, thereby bringing the dividend yield close to 4.4%, which is lucrative among regular income-seeking investors.

Risks associated with investment

The group is majorly exposed to the volatility in the interest rates, which leads to the risk of asset-liability mismatch. Also, the company is facing challenges such as price war in the premiums from its peers, currency volatility, economic slowdown, and withdrawals of the assets under management on account of any turmoil in the global markets.

Financial overview of Q1FY22 (Expressed in millions of CAD)

Source: Company Filing

• The group reported an increase in the net premiums to CAD 5,291 million in Q1FY22, against the net premium of CAD 5,126 million in Q1FY21. But on account of the increased losses from net investment income in Q1FY22, the total revenue declined to CAD 380 million in the same period (Q1FY22) vs the total revenue of CAD 1,514 million in Q1FY21.

• During Q1FY22, the total benefits and expenses turned to negative CAD 780 million against the total benefits and expenses of CAD 178 million in the pcp. On account of lower insurance contract liability in the reported period (Q1FY22), the group reported overall expenses.

• The group reported a total net income of CAD 892 million in Q1FY22 as compared to the total net income of CAD 1,011 million in Q1FY21.

Valuation Methodology (Illustrative): Price/ Book value-based

Analysis by Kalkine Group

Stock Recommendation:

The company reported an increase in the total net premiums to CAD 5,291 million in Q1FY22 when measured against the net premiums of CAD 5,126 million in the Q1FY21, also the fee income climbed to CAD 1,980 million in the same period (Q1FY22) against the fee income of CAD 1,885 million in Q1FY21. Further, the group witnessed an increase in the total AUM to CAD 1,352 billion against the total AUM of CAD 1,304 billion in the pcp.  The recent acquisition of DentaQuest will help the company to further record annual revenue of more than USD 7 billion, thereby strengthening the company’s financials. On the valuation front, the stock is measured on the Price/ Book-value based relative valuation multiple and we have considered Globe Life Inc., and Primerica Inc. as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock of SLF at the last closing price of CAD 62.61 on June 02, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as of June 2, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

Technical Analysis Summary

Disclaimer

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