BMO NB's Comment on Sun Life's Q4 2005 Earnings

Forecasts

We have trimmed our forecasts by $0.05 in 2006 and 2007 to reflect a higher Canadian/U.S. dollar exchange rate of 1.15 compared with 1.18 in previous estimates, and slightly lower expectations from MFS.

Valuation

Valuations in the sector have increased and we are marginally increasing the target price of Sun Life to $54 from $52. The $54 target price represents 1.95x 2006E BVPS, which is consistent with its current trading multiple, and 15.2x 2006E EPS, which is consistent with the current P/E multiple on 2005 EPS.

Recommendation

Sun Life remains Outperform rated. We have been recommending SLF shares for the last six months, based on the thesis that rising ROE would have positive implications for valuation. Over the last couple of quarters, the valuation has improved from roughly 1.6x book value to 1.9x book value. While we believe that the rising ROE/valuation improvement thesis continues to have potential,the incremental return appears more limited given the rise in the share price. SLF announced an 8% dividend increase and an increase in its targeted payout ratio range to 30–40% from 25–35%. While quarterly results were satisfactory, we believe that yield-oriented investors will continue to be attracted to SLF.;