Australia | Dec 14 2006
By Chris Shaw
QBE Insurance (QBE) has long been regarded as one of the best acquirers of businesses in the Australian market place and rightly so given its impressive track record. With no significant acquisition in the past year there had been some concerns the company had found it tougher going in terms of finding suitable targets, but as Morgan Stanley notes the acquisition of the US-based Praetorian puts these fears to rest.
The company announced after trading yesterday it would buy Praetorian for US$800m, acquiring operations GSJB Were suggests will be highly complimentary to its existing US operations. Deutsche Bank notes it will achieve something of a transformation for the company as the US operations will now become the group’s largest business unit. It estimates the deal will increase gross written premiums by around 16%.
ABN Amro, which rates the stock as Buy, sees the move as a high margin acquisition that doubles the company’s US operations with a benefit of there being no significant increase in the company’s catastrophe exposure. The broker estimates the acquisition was priced on a P/E (price to earnings) ratio of 6.3x, making it immediately accretive to earnings.
It has lifted its earnings per share forecasts for FY07 by 5.9% to 216c and in FY08 by 9.6% to 228c, putting it at the higher end of market forecasts. Credit Suisse has lifted its forecasts for the same period by 6% to 181.8c and by 11% to 194.1c, while Merrill Lynch has increased its estimates for FY07 by 12% and for FY08 by 14% to 191c and 199c respectively.
GSJB Were has also increased its forecasts, noting the acquisition is expected to deliver an earnings increase of around 10% next year while pointing to the chance for the actual outcome to be 11-12% given the potential for synergies as the company is integrated. Longer-term the risk to earnings is to the upside in the view of Morgan Stanley, who points out the deal increases scale in the US operations and so improves the potential to both increase expected synergies and make additional acquisitions.
Merrill Lynch points out there are two potential negatives to the acquisition in that the business has a high skew to US casualty risks and 79% of the underwritten risk stems from third parties. While these are factors to look out for going forward the broker suggests the quality of QBE’s management team is good enough to make the deal work, so the broker has upgraded its rating to Buy.
The broker points out at the same time as announcing the acquisition management has released a revised outlook for 2006, which while in line with the broker’s forecast of a 20% increase in insurance margins may disappoint some in the market who had factored in a higher outcome.
ABN Amro and Credit Suisse are in this category, both brokers cutting their current year earnings estimates to reflect the margin outcome. ABN has reduced its forecast by 5.2% to 173c, while for Credit Suisse the cut is 9% to 166.9c.
Following news of the acquisition the FNArena database shows QBE is rated as Buy eight times compared to two Hold ratings, with an average price target of $29.16. This compares to the previous average target of $26.52, while Thomson One Analytics noted the previous median price target was $26.40.
JP Morgan predicted the stock could jump by as much as 10% on the news of the acquisition and its prediction appears close to the mark, as in early trading the stock is up $2.46 or 9.4% to $28.76.