Australia | May 30 2013
-Acquires two more agencies
-GWP now set to be over $210m annualised
-Hardening of premiums most positive aspect
By Eva Brocklehurst
Austbrokers ((AUB)) has added another bunch of acquisitions to its stable of insurance broking businesses, contributing to the scale of the company's Austagencies division. Total gross written premium for the insurance underwriting agency business is now expected to be over $210 million on an annualised basis.
Austagencies has acquired 90% of Lawsons Underwriting Australasia and Guardian Underwriting Services for an aggregate purchase price of around $10 million. An initial 75% will be paid up front from cash and the remainder will be paid in May 2014, from cash and debt. After financing costs, the transactions are expected to be 2-3% accretive to earnings in FY14 and add around $30 million to gross written premium. These agencies operate in the specialist areas of complex contract and labour hire (Lawsons) and hospitality industry property and liability (Guardian). The agencies take on no underwriting risk. Austagencies acts an umbrella management company, providing processing and claims management and back office support. Employees will hold the residual 10% of each agency, consistent with Austbrokers' model.
UBS maintains Austbrokers has a healthy balance sheet, with gearing at 17% versus a target range of 30%. The current debt facility is locked to August 2013 but management has agreed terms for a new facility of $40 million over three years, which should be closed soon. UBS likes the growth outlook and, as the stock continues to trade above the long term median 1-year forward price earnings of 13.5 times, rates the stock a Buy. This is underpinned by the quality of management and the stable industry structure.
Goldman Sachs likes the focus on niche industries in the underwriting sector. Earnings forecasts have been upgraded on the back of the acquisitions by 2% for FY14 and 1% for FY15. This may be lower than the company's accretion guidance but the broker offsets it with dilution from recent option issues. There have been 14 acquisitions thus far in FY13 and these latest ones confirm the importance of acquisitions to the company's growth projections. Goldman estimates Austbrokers has now spent more than $27 million on acquisitions in FY13, the largest single year of such activity since the company listed in 2005.
BA-Merrill Lynch likes the business and finds evidence of strong earnings momentum with relatively low risks. Austbrokers has withstood competition, economic cycles and commoditisation over the years. Merrills is curious about the upcoming IPO of Steadfast. According to reports, that company intends to lodge a prospectus on June 28. Listing is likely in late July, early August. Steadfast expects about $30 million in earnings and to pay out 65-85% of net profit as fully franked dividends. The introduction of Steadfast to the ASX should keep Austbrokers on the radar for investors, in the broker's opinion.
The most positive aspect of the near term environment for Austbrokers is a hardening of premiums, in Merrills' view, despite a subdued small-medium enterprise sector. Premium rates are one of the key risks for the stock, along with increased failure rates of SMEs and lower interest rates.
There are three Buy and one Hold ratings on the FNArena database, but two out of the four stockbrokers have yet to update their view (Goldman Sachs is not part of FNArena's daily monitoring). The consensus target price is $10.25, level pegging with the last share price. The dividend yield on consensus earnings forecasts for FY13 is 3.3% and for FY14 it's 3.6%.
See also, Austbrokers Pleases With Another Upgrade on February 26 2013
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