More Returns As Suncorp Sells Chop Shops?

Australia | Oct 02 2019

Suncorp Group will sell two motor repair businesses to AMA Group, in a deal designed to improve utilisation of the repair shops while retaining a cost benefit.

-Agreement that Suncorp's lower costs relative to peers will be maintained
-Utilisation of the network should be improved without increasing claims costs for Suncorp
-High chance of further capital management in the second half of FY20 from Suncorp


By Eva Brocklehurst

The sale of two motor repair businesses to AMA Group ((AMA)) should make Suncorp Group ((SUN)) shareholders very happy, several brokers suggest, allowing for bumper returns in the second half of FY20. The sale includes a 90% stake in Capital SMART, valued at $420m, with Suncorp retaining 10% and a subsidiary board seat. The other divestment is ACM Parts for $20m.

Suncorp is not generating sufficient repair volumes to maximise the use of the Capital SMART shops, Citi points out. Hence, selling these to another party that can attract external customers to the underutilised facilities make strategic sense.

Moreover, the multiple looks reasonable. However, in terms of sales this is marginally negative for underlying margins as the divestment removes the business profit that was previously netted against insurance claims.

Still, by opening up the opportunity to vehicles that are not insured by Suncorp, but obtaining cost benefits in the long-term agreement, utilisation of the network can be improved without increasing claims costs for Suncorp.

Macquarie suspects only time will tell whether de-coupling from the supply chain is the best result for insurance customers and Suncorp's margins. The broker's analysis indicates that the combined business of AMA Group and Capital SMART is overweight Victoria and underweight Queensland, and will observe with interest whether this forms part of Suncorp's growth plan in motor insurance.

Owning the supply chain has been a critical reason why Suncorp's claims have outperformed industry, the broker notes. The deal has been done on the agreement that Suncorp's lower costs relative to peers will be maintained. Macquarie also understands there are no stranded costs for Suncorp post the sale. Neither will there be any major change to the average cost of a repair.

The main risk Ord Minnett envisages is that Suncorp will open the door for other insurers to benefit from similar cost-of-repair outcomes through AMA Group. Suncorp believes it is locking in a competitive advantage in motor repairs, having considered the sale on grounds that scale was needed for repairs and it was losing market share.

Nonetheless, Ord Minnett suspects that, if there is a competitive advantage, it would be difficult for Suncorp to maintain this with certainty, as other insurance providers can now use these shops through the AMA Group.

Capital Return

Suncorp has not indicated what will be done with the proceeds. Ord Minnett estimates it would allow the funding of around $400m in capital returns in the second half of FY20 and result in a net loss of about -$12m overall.

Macquarie now includes a $400m capital return in forecasts for the second half of FY20. The combined value of $440m for the two businesses equates to a profit on sale of $275-295m and a 25-year service agreement in Australia (12 years in New Zealand) adds to the attractiveness of the deal.

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