Australian Equities Income Portfolio
Selling Suncorp (SUN)
We have sold our position in Suncorp in the Income Portfolio. We believe that the strong price increase in Suncorp’s general insurance business in 1H23 (Home +10.7% and Motor +8.9%), solid volume growth in Suncorp bank, and the improvement in investment yields from rising interest rates have been reflected in the share price. Since we initiated the stock in the portfolio in March 2021, it has achieved an exceptional 51% uplift in total return, compared to the ASX200’s 15.1% total return over the same period.
For Australian general insurers, we expect persistent headwinds in the form of higher reinsurance costs and claims inflation. Factors such as increases in natural disasters, rising inflation, and the Russia/Ukraine war have led to a growing demand for reinsurance. However, reinsurance capacity and capital are constrained, resulting in a robust increase in reinsurance prices, increased net retentions, and stricter terms and conditions in the recent renewals in January 2023 and April 2023.
SUN is approaching a significant period for its reinsurance covers, with all its reinsurance program up for renewal on 1 July 2023. A more challenging reinsurance market could potentially increase balance sheet risk for SUN and other primary insurers, necessitating the holding of more capital and subjecting them to greater volatility. Considering these concerns, we have decided to exit the position and realise the 31% capital gains.
Increasing Integral Diagnostics (IDX)
The proceeds from selling SUN have been used to fund the addition to Integral Diagnostics (IDX). The recovery in imaging volumes plays a crucial role in margin recovery given the high fixed cost nature of the business. Although the Medicare data showed that the growth rate of diagnostic imaging benefits slowed in the month of April, for the fiscal year to April 2023 it increased by 7.5% compared to the prior corresponding period. The fundamental volume drivers, such as population growth, ageing, and utilisation remain intact.
Additionally, we expect tailwinds from higher modality mix and improved MBS indexation of 3.6% in FY24 (vs only 1.6% in FY23) to contribute meaningfully to IDX’s margin recovery in FY24/25, and EBITDA margin to recover back to mid-20% in FY26.