Monday, April 30, 2007

RBC CM Initiates Coverage of Sun Life at Sector Perform

RBC Capital Markets, 30 April 2007


We are initiating coverage of Sun Life with a Sector Perform, Average Risk rating on its shares.

Investment Opinion

• The stock's slight discount against Manulife and Great-West is justified, in our view. International platforms are less well established than Manulife, while earnings quality and embedded value growth has been weaker.

• Compared to Great-West, Sun Life is more exposed to changes in accounting standards and deteriorating credit quality and has less upside potential from recent acquisitions.

• Positively, Sun Life is highly capitalized, has exposure to large asset management businesses and has a well-positioned domestic group platform. Also, the company would benefit more than banks from a flat to down Canadian dollar and rising interest rates, while it would be less impacted by deteriorating credit quality.

• Valuation. Our 12-month price target of $57 is a combination of our P/E, price to book and embedded value methodologies. We believe that Sun Life's valuation is likely to trend toward its 5-year average if credit quality weakens and if increases in equity markets slow from recent years. Our P/B target of 2.0x in 12 months is at the low end of our target for lifecos given a lower expected ROE. Our target P/E multiple of 13.0x 2008E earnings is above the company's 5-year average forward P/E to reflect potential benefits from higher interest rates and a more accommodating currency conversion environment, partially offset by deteriorating credit quality, uncertain equity market performance and lack of benefits from transformational acquisitions. Our target multiple on embedded value of 1.6x reflects the mature nature of the Canadian insurance industry and superior growth prospects in Asia.