Smashing Sale

Suncorp announced the sale of two motor repair businesses to AMA Group:

 

  • A 90% stake in its Capital S.M.A.R.T. smash repair operation, valuing 100% of the business at $420m, whereby Suncorp will retain a 10% stake and a subsidiary board seat; and

     

  • Auto parts supplier ACM Parts for cash consideration of $20m, broadly in line with book value.

Suncorp said that despite the sale, it would lock in the “competitive advantage” it believes it has in motor repairs through a 15-year strategic partnership with Capital S.M.A.R.T. and AMA, which will allow its members to access the business. We previously noted the company was considering the sale on the grounds that scale was what was needed for a repairs operation. We now see a risk that Suncorp will open the door for other insurers to benefit from similar cost-of-repair outcomes through the AMA group.

 

Suncorp has not yet guided as to what it will do with the proceeds, although we estimate this move will allow Suncorp to fund about $400m of capital return in the second half of FY19 and result in a net loss of about $12m.

 

We have reduced our ongoing insurance margin forecast on a run-rate basis by 0.2% to reflect the impact of the sale of Capital S.M.A.R.T. at the claims (and, to some extent, expense) line. We have also included a one-off book profit on sale of $285m in 1H20. All of this results in a net 1.1% boost to adjusted EPS on an ongoing basis.

 

We maintain our Hold recommendation, while our target price has increased slightly to $13.58 from $13.49.

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