Tuesday, August 01, 2006

RBC CM Preview of Manulife Q2 2006 Earnings

RBC Capital Markets, 1 August 2006

Manulife reports Q2 earnings on August 3rd.

Looking for 15% Q206 EPS Growth. Our consensus-like $0.60 cash EPS estimate is indicated up 15.4% YoY, and flat QoQ. This estimate includes a 6-7% foreign exchange translation drag, indicating underlying EPS growth of over 20%. We have also factored a 2¢ or 11% dividend increase to 20¢.

Share Buyback as an EPS Revisions Theme. Manulife stoked up its share repurchases to 25.7 million in Q2 - by 5X our modeled level. While MFC will likely remain opportunistic, the unusually high activity this quarter should help keep a ‘floor’ on the stock price in the minds of investors, and temper speculation that Manulife has only large acquisitions in mind.

Manulife Uniquely Geared to Higher Rates. The Hancock acquisition provided Manulife a unique interest rate opportunity that we believe could bear fruit over the next few quarters. We look for both (i) higher run-rate investment income and (ii) a significant reserve release (Q406). This should be another favourable EPS differentiator versus peers.

Sales Growth to Normalize, But From Spectacular Levels. MFC’s sales growth has been super-normal through its highly-successful Hancock integration – we are factoring a gradual slow-down, towards a more sustainable low double digit growth rate over the course of the next 2-3 quarters. This may be accompanied by normalizing “sales strain” impact, with a commensurate EPS benefit. Some notable sales projections: (i) $240MM in U.S. life sales, up 44% YoY; (ii) $3B in U.S. variable annuity sales, up 47% YoY; (iii) U.S. group pension sales growth of 55% YoY, Canadian pension sales growth of 47% YoY. We factor a more normal average of ~10% sales growth YoY for key domestic and Asian divisions.

Valuation. Our $43 price target reflects a 16.5x forward P/E for MFC, above our Canadian lifeco target average of 15x. to reflect excellent operating performance, strong capitalization and a leading global market position, with particularly strong growth prospects in the U.S. and Asia. For 2006, we estimate $2.50 cash EPS (3¢ above consensus) and for 2007, our $2.89 estimate is 8¢ above consensus. In both cases, we have more aggressive operating margin expectations, reflecting continued excellent execution, positive interest rate EPS torque, and favourable share buyback activity. Risk centres on foreign exchange translation, as nearly two-thirds of earnings are USD-based and unhedged. Also, Manulife could be susceptible to a downturn in claims experience or an unusually bad credit market.