Tuesday, May 06, 2008

Sun Life Q1 2008 Earnings

RBC Capital Markets, 6 May 2008

Q1/08 EPS were short of our expectations by 8% and were down 4% on a core basis versus Q1/07. The weakness was mostly driven by the difficult macro environment, namely the high Canadian dollar, deteriorating credit quality and weak equity markets.

We have lowered our 2008E EPS from $4.30 to $4.10, our 2009E EPS from $4.80 to $4.60 and our 12-month target price from $53 to $50 per share. We expect Q1/08 results to be the weakest of the four 2008 quarters as currency comparisons should become easier and equity markets have rebounded from Q1/08 levels.

We now expect 2008 growth in EPS of 4%, well below what the company has delivered in the past and below management's medium term objective of 10% annual EPS growth.

Sun Life's stock trades at 11.2x NTM EPS, versus 11.9-12.7 times for its peers and a 7-year average of 13.7x. We expect lifecos to trade at higher multiples in the medium term, but trading multiples could remain below the 7-year average for some time given the potential negative impact of lower interest rates, probable deterioration in credit quality, and uncertain equity markets.

We continue to rate Sun Life's shares Sector Perform. Sun Life is highly capitalized, has exposure to large asset management businesses, and has a well-positioned domestic group platform. We also believe that the company is in a better position than banks to manage through a volatile capital market and credit environment, although the company is not immune to the difficult macro environment, as evidenced by the last two quarters' results. We are relatively more positive on the stocks of Industrial Alliance (IAG.TO, $39.40, rated Outperform, Average Risk) and Manulife (MFC.TO, $39.25, rated Outperform, Average Risk).