Friday, August 11, 2006

BMO CM on Sun Life Financial

BMO Capital Markets, 11 August 2006

Year to date, Sun Life shares generated the worst total returns among the large cap financial services companies, down 10.6%. The margin is quite wide as the closest comparisons are GWO, down 6.5%, and TD, down 3.9%. SLF currently trades at 1.6x bvps and 12.2x and 11.1x ‘06E and ‘07E EPS, respectively, cheaper than the lifeco and bank group averages. The yield is 2.9%, which we believe is an all-time high. Excluding MFS, SLF trades at 11.2x and 10.4x ‘06E and ‘07E EPS, respectively. Also excluding MFS, SLF trades at 1.6x bvps and the ROE would decline to 12.5% from 13.5% (MFS generates very high ROEs). The share price underperformance reflects a number of items including disappointing quarterly results, turnover in senior management, and frustration on the apparent unwillingness (or timing) to address structural opportunities (i.e., surfacing value at MFS). While we share these concerns, there are some positive developments. First, SLF has an opportunity to re-invigorate senior management ranks with two new key hires, particularly a new CFO and new COO. Second, while financial results were discouraging, new sales results and value of new business continued to show very positive trends. We also believe that SLF is more than willing to consider strategic alternatives for MFS. SLF is not considering any material acquisitions and excess capital is being used for buybacks and dividends. SLF is Outperform rated.