1H13E 2H13E 1H14E 2H14E 1H15E 2H15E AUSTRALIA CGF AU Price (at CLOSE#, 20 Aug 2012) Outperform A$3.76 Volatility index Low 12-month target A$ 4.57 12-month TSR % +26.4 Valuation - Sum of Parts A$ 4.57 GICS sector Diversified Financials Market cap A$m 2,048 30-day avg turnover A$m 6.9 Number shares on issue m 544.7 Investment fundamentals Year end 30 Jun 2012A 2013E 2014E 2015E Revenue m 527.9 532.0 539.0 542.1 EBIT m 338.7 337.8 338.9 336.2 Reported profit m 153.8 306.3 304.4 266.1 Adjusted profit m 300.3 295.1 292.6 253.7 Gross cashflow m 300.3 295.1 292.6 253.7 CFPS 56.2 53.2 52.7 45.7 CFPS growth % 16.9-5.4-0.9-13.3 PGCFPS x 6.7 7.1 7.1 8.2 PGCFPS rel x 0.78 0.91 1.01 1.23 EPS adj 56.2 53.2 52.7 45.7 EPS adj growth % 16.9-5.4-0.9-13.3 PER adj x 6.7 7.1 7.1 8.2 PER rel x 0.50 0.57 0.63 0.76 Total DPS 18.0 18.0 19.0 16.0 Total div yield % 4.8 4.8 5.1 4.3 Franking % 0 0 0 0 ROA % 3.2 2.8 2.5 2.4 ROE % 18.9 16.4 14.6 11.6 EV/EBITDA x 5.8 5.8 5.8 5.8 Net debt/equity % -4.6-4.2-3.8-3.6 P/BV x 1.2 1.1 1.0 0.9 CGF AU vs ASX 100, & rec history Experiencing life s challenges is normal Event FY12 Normalised NPAT ($297m) in line, experience (-$148m post tax) once again a drag on statutory NPAT ($149m). Final DPS 10.5cps (1H12: 7.5cps, Consensus: 9.5cps, Macquarie: 9.0cps) combined with positive news flow on capital position last week should be well received. Impact Experience variance impact larger than expected. Investment experience pre tax impact of -$195m, above Macquarie expectation of -$167m. The variance to our expectation was largely at the property line, where valuations remained relatively unchanged but lower interest rates resulted in negative experience on property hedges. FY13 Outlook in line with Macquarie expectations: Life normalised earnings $440m - $450m, growth, in line with Macquarie expectations of $440m. 1 FY13 retail net annuity sales growth is in line with FY12 (10.). Normalised margin trends expected to decline - - - - Actual Reported margin Normalised margin Forecast - - - - Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, August 2012 (all figures in AUD unless noted) 21 August 2012 Macquarie Securities (Australia) Limited Source: Macquarie Research, August 2012 Earnings and target price revision EPS revisions: FY12 +3.3%, FY13-0.9% FY14-1.9%. TP +1.3% to $4.57. Price catalyst 12-month price target: A$4.57 based on a Sum of Parts methodology. Catalyst: 1Q13 AUM in mid-october, credit spread tightening Action and recommendation Outperform. represents clear value at current levels, currently trading on a 6.9x consensus FY13 PER, 4.7% dividend yield (3 payout ratio as the company grows the capital intensive life book). With risk around the capital position reduced following last week s APRA LAGIC transition update, there is a clear opportunity for CGF to re-rate as normalised earnings growth continues to deliver. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website www.macquarie.com/disclosures.
1H13E 2H13E 1H14E 2H14E 1H15E 2H15E Fig 1 result summary What we liked What we didn t like What we thought was interesting New APRA capital standards that provided more generous transition was supported by a higher than forecast DPS at $0.105. Generous APRA treatment is expected to enable internal capital generation to meet regulatory capital targets. FY13 financial targets in line, despite the financial sector facing regulatory change. Life normalised earnings $440m - $450m, growth, in line with Macquarie expectations of $443m. 1 Retail annuity sales growth. Credit quality on the investment book has improved on a headline basis. Cash, AAA, and AA exposure is now close to 5 of investment assets, with sub investment grade at its lowest reported level (1). While disclosure is still limited, credit quality appears to be improving relative to prior years. Funds management business seeing inflows. FY12 net income $83.0m and PBT $21.0m were in line (Macquarie NI $82.6m, NPBT $22.2m) 4Q12 net flows $760m ex MIR acquisition ($1.1bn). Experience variance impact larger than expected. Investment experience pre tax impact of -$195m, above Macquarie expectation of -$167m. The variance to our expectation was largely at the property line where valuations remained relatively unchanged but lower interest rates resulted in negative experience on property hedges. Fee for service as a percentage of retail sales is now ~7, up from less than 4 in Dec 2010. This is a positive for CGF through lower commissions. Long-term annuity sales increasing as a percentage total annuity sales. This is reflected in the average duration increasing from 4.5yrs in FY11 to 5.4yrs in FY12. Fig 2 Reported margin falls well short of normalised margin again in 2H12 Actual Forecast - - - - - Reported margin Normalised margin - - - Source: Company Data, Macquarie Research, August 2012 21 August 2012 2
What we liked Fig 3 Three years of high Normalised and high Statutory ROEs (with 1H12 the exception) in challenging markets ROE 3 2 1-1 -2-3 -4 Life Statutory ROE Life Normalised ROE Credit quality on the investment book has improved on a headline basis. Cash, AAA, and AA exposure is now close to 5 of investment assets, with sub investment grade at its lowest reported level (1). While disclosure is still limited, credit quality appears to be improving relative to prior years. Fig 4 Reversal in credit quality trend in the investment book - cash, AAA and AA investments now ~5 Fig 5 resulting in sub investment grade and unrated exposure now at its lowest reported level. 10 9 8 7 6 5 4 3 2 1 Sub investment grade & unrated 2 2 2 2 1 1 1 1 1 Cash, AAA, AA A BBB BB B Unrated Source (for all above):, Macquarie Research, August 2012 21 August 2012 3
What we didn t like Experience variance impact larger than expected. Investment experience pre-tax impact of - $195m, above Macquarie expectation of -$167m. The variance to our expectation was largely at the property line, where valuations remained relatively unchanged but lower interest rates resulted in negative experience on property hedges. Fig 6 The gap between statutory and normalised profit keeps widening 400 Indexed EPS 350 300 250 200 150 100 50 0 Fig 7 Contributors to experience in recent periods has been mixed Fig 8 The fixed interest book being driven by domestic corporate credit spreads Experience contrib to Stat Spread 4. 3.5% 3. 2.5% 2. 1.5% 1. 0.5% 0. -0.5% -1. -1.5% -2. -2.5% Cash/Fixed Int Property Actuarial Infrastructure Equity & Other Australia 5yr corporate ITRAXX 450 400 350 300 250 200 150 100 50 0 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Source (for all above):, Macquarie Research, August 2012 21 August 2012 4
1H13E 2H13E 1H14E 2H14E 1H15E 2H15E What we found interesting Fig 9 Fixed interest allocation has steadily risen over the past six years at the expense of real assets - driving portfolio normalised growth assumptions lower Normalised capital growth Fixed interest allocation 2. 1. 1. 1. 1. 1. 0. 0. 0. 0. 0. % of investment assets in fixed interest and cash Normalised capital growth 8 7 6 5 4 3 2 Source: Macquarie Research, August 2012 Fee for service as a percentage of retail sales is now ~7, up from less than 4 in Dec 2010. This is a positive for CGF through lower commissions. Fig 10 Fee for service sales consistently rising vs. commission based sales approaching FOFA Fig 11 driving CGF fees and commissions paid down to very low levels. Fees and comms paid 0. 0.7% 0. 0.5% 0. 0.3% 0. 0.1% 0. Actual Forecast Source (for all above):, Macquarie Research, August 2012 21 August 2012 5
21 August 2012 6
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+1 Neutral expected return from -1 to +1 Underperform expected return <-1 Macquarie First South - South Africa Outperform expected return >+1 Neutral expected return from -1 to +1 Underperform expected return <-1 Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 10 in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 6 in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 4 in a year. Low medium stock should be expected to move up or down at least 25 3 in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2012 AU/NZ Asia RSA USA CA EUR Outperform 55.67% 61.0 53.43% 42.5 69.23% 46.6 (for US coverage by MCUSA, 9.05% of stocks followed are investment banking clients) Neutral 30.5 22.11% 36.99% 52.41% 28.0 33.69% (for US coverage by MCUSA, 8.1 of stocks followed are investment banking clients) Underperform 13.83% 16.89% 9.59% 5.01% 2.75% 19.71% (for US coverage by MCUSA, 0.45% of stocks covered are investment banking clients) Company Specific Disclosures: Macquarie Bank Limited makes a market in the securities in respect of Financial Services Group Limited. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. 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The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. 21 August 2012 7