Brokers More Bullish Than Austbrokers Management

This story features AUB GROUP LIMITED.
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The company is included in ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Insurance broker Austbrokers Holdings ((AUB)) delivered what the market viewed as a high quality result yesterday, UBS pointing out every financial metric it measures continues to point in the right direction as organic growth is accelerating and cash flows and ancillary revenue streams both increased.

Net profit of $18 million was above the broker’s $17.6 million forecast. UBS also notes solid growth is expected to continue as management has guided to earnings growth in FY10 of 5-10%. Such an outcome wil prove to be conservative in its view given the broker’s forecast is for 12% growth and it sees the risk to its number as to the upside.

Taking an even longer-term view the broker suggests the combination of a quality management team, a stable industry structure and increasing organic growth should see the company deliver consistently good returns. To reflect this UBS has lifted its price target to $5.55 from $4.60 while retaining its Buy rating.

The stock has done well over the past year in outperforming the ASX/Small Ords index by a little more than 50% but the broker notes it has struggled in the most recent market rally. UBS expects this relative performance to turn around given the solid growth outlook expected over the next few years.

GSJB Were is similarly positive, noting management’s guidance of 5-10% earnings growth for the coming year matches its guidance from last year when the company ended up delivering a better than 14% improvement in earnings. As well, GSJBW points out the company has introduced a dividend reinvestment plan and intends to have it underwritten, which will deliver an estimated $6.7 million the company can use to grow its business.

The other scope for upside in the broker’s view is from increases to insurance premiums, which it notes would be the company’s first up cycle since it listed. GSJBW is forecasting an increase of around 3.5%, pointing out the company should enjoy good leverage to any increase in revenues as there will be little in the way of additional associated costs.

Having factored the result into its model, GSJB Were is now forecasting earnings per share (EPS) for the company of 39.1c in FY10 and 42.5c in FY11, while UBS is at 40c and 45c respectively. RBS Australia is slightly more conservative with its numbers at 37.6c and 39.3c respectively, while the FNArena database shows consensus forecasts of 39.4c and 43.3c.

While it is attracted to the combination of high quality and low risk earnings, RBS Australia also views the stock as inexpensive given at yesterday’s close it was trading on only 12.8x the broker’s FY10 earnings forecasts. Given some changes to its forecasts, RBS has lifted its target to $6.38 from $5.09, while the average price target according to the FNArena database has increased to $6.03 from $5.05. The database shows all four brokers to cover the stock rate it as a Buy at present.

Shares in Austbrokers today are stronger and as at 12.40pm the stock was up 17c at $5.00. This compares to a trading range over the past year of $3.30 to $5.00.

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