The Australian stock market continues to surge ahead, despite...

The Australian stock market continues to surge ahead, despite company earnings growing at a slower rate. This is a recipe for stretched valuations, so the challenge is now for investors to distinguish between good companies, and good companies trading on attractive valuations.




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"We simply believe that Suncorp is a sound business with a solid valuation and as such, represents a defensive and relatively low risk exposure."

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We believe Suncorp (SUN) fits into the latter category. The company is unique in the financial services industry, combining insurance, banking and wealth management into the one organisation. While the structure is not without its sceptics, long-term profit growth has been impressive.






From a charting perspective, Suncorp has been in a long-term upward trend for much of the past decade. Although upward momentum has slowed since 2005, the stock remains firm and we believe further gains are achievable in the coming months.

Fundamentally, we believe the company is undervalued. This is reflected in the valuation ratios of the stock. Suncorp trades on a price-to-earnings multiple of around 13 times and a fully franked dividend yield of nearly 5 percent - not bad for a blue chip in this frothy share price environment.

That isn't to say that Suncorp is headed for $30 on the back of private equity takeover speculation. We simply believe that Suncorp is a sound business with a solid valuation and as such, represents a defensive and relatively low risk exposure.

While the share price has more or less moved sideways for the past few years, more recently, investors have shunned Suncorp due to the lengthy takeover of fellow insurer, Promina.






Suncorp made a cash and scrip (share issue) offer for Promina back in October last year, valuing the company at nearly $8 billion. After receiving shareholder and ACCC approval, the two companies officially began to operate as one on March 20. While benefits won't flow through immediately, the merger improves the general insurance industry structure and should benefit all players over time.

Before the Promina merger, Suncorp was Australia's fourth largest general insurance group with annual premium revenue of $2.6 billion. With the Promina merger complete, the Suncorp Group is now Australia's 3rd biggest general insurance group and 6th largest bank, with assets of $73 billion and more than 8 million customers.

The company has certainly come a long way in the past 10 years. In late 1996, Suncorp (then owned by the Queensland Government) merged with the publicly listed company Metway Bank, to create Suncorp Metway Ltd, as the company is now officially known.

This story continues in the Fat Prophets Members area. To get the complete report, along with our current recommendation, join Fat Prophets today!

This story continues in the Fat Prophets Members area. To get the complete report on Suncorp, along with our current recommendation, join Fat Prophets today!