Australia | Feb 26 2013
-First half results please
-Acquisitions still feature
-Sound growth record to continue
By Eva Brocklehurst
Austbrokers ((AUB)) pleased on many fronts with its half year results. The insurance broking business showed the benefits of acquisitions and a favourable premium rate environment. Full year guidance was upgraded for the third year in a row, income was strong and operating margins were stable.
Austbrokers expects 10-15% profit growth in FY13. Accordingly, there was a rush from analysts to revise up earnings forecasts. Macquarie expects the rest of FY13 to show the same positive trends. Organic volume growth should come from increased customer take-up of commercial insurance, while premium growth will be driven by increases in underwriting agencies as well as contributions from recent acquisitions. Offsets? A slight reduction in interest income from low interest rates. Credit Suisse expects similar drivers of growth but does not believe Austbrokers will benefit from a hardening of premium Small-Medium Enterprise (SME) rates in the near term. BA-Merrill Lynch is of the same opinion, noting the SME sector economics affects the activity level for the likes of Austbrokers. BA-ML finds the current economic environment weak, albeit improving.
Credit Suisse is confident of further upside to earnings in the medium term, given the company's ability to win new market share as well as increasing the diversity of income. Life insurance income increased 25% on the prior corresponding half, largely from the July 2012 acquisition of Taggart & Associates and the January 2012 acquisition of Gladstone. BA-ML flags rising premium rates in the Australian general insurance market, particularly in property classes. This segment comprises over 40% of Austbrokers business and should translate into strong commission growth.
For UBS, the consolidation in the industry will continue and this means more acquisitions are on the cards. Austbrokers made six business/portfolio acquisitions in the half, including BGA Insurance Brokers in December, and spent $15.5 million. Nevertheless, BA-ML sounds a note of caution through all the upbeat prognostications. It is difficult to judge the merits of the acquisitions other than on earnings appreciation, although this has been solid.
With much upside priced in Credit Suisse prefers to retain a Hold rating. On the FNArena database this is the only one. The three others covering the stock have Buy ratings. UBS is one of those and highlights a good result for commission and fee income. Moreover, this organic growth should continue as the bulk of renewals comes in the second half. For UBS the stock is not cheap but the strong returns underpin the Buy rating. BA-ML liked it all, noting the business has a stable history of delivering. The broker also finds Austbrokers is a direct play on the insurance cycle, perhaps better than the insurers themselves. This way you get to avoid claims risks. Macquarie has the third Buy rating. Industry dynamics present a strong upside risk to the broker's forecasts, regardless of the macro economic environment. The database consensus is $9.64, revealing 5.9% upside to yesterday's closing share price.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
