Austbrokers Lays Firm Foundation For FY14

This story features AUB GROUP LIMITED. For more info SHARE ANALYSIS: AUB

-Brokers find guidance conservative
-Firm FY14 expected
-More acquisition potential exists
 

By Eva Brocklehurst

Austbrokers ((AUB)) revealed growth in commission and fee income in FY13. A key difference in the results, compared with Macquarie's forecasts, was the greater contribution from profit commissions paid by underwriters, although the broker cautions about reading too much into this as these commissions can be volatile. Commission and fee income in the broking network rose 6.2% with premium rate increases largely confined to property classes with liability rates that were either flat or slightly lower.

It was business as usual for most brokers but, despite the firm results, Credit Suisse decided to downgraded the stock to Underperform from Neutral, expecting minimal organic growth in FY14 and some headwinds for near-term earnings. FY13 benefited from a period of higher interest rates, favourable profit commissions and rising premium rates but Credit Suisse sees all three potentially pulling back in FY14. This aside, the broker still thinks FY14 will show a profit rise of 11.7% on FY13, slightly above management's guidance.

UBS has raised profit estimates by 2.9% in FY14 and 2.4% in FY15, given operating leverage, as efficiency initiatives flow through, combined with recent acquisitions. The broker noes the stock was carrying higher costs into a softer interest rate market but thinks this should normalise in FY14. Austbrokers continues to capitalise on enterprise software such as iClose, as well as its business pricing and quote system. UBS believes the economic outlook for the small and medium enterprise sector will be the key driver of earnings ahead. Acquisition opportunities may still abound, but the broker recommends patience. Longer term, the relationship with IBNA, which collectively controls over $900m of business, should provide further acquisition opportunities, in UBS' view.

Macquarie hailed the results, driven by good growth in the insurance broking and underwriting agency businesses, which more than offset an increase in corporate costs. FY13 produced heightened acquisition activity and the broker suspects this may continue into FY14, albeit not at the same level. Macquarie is comfortable with forecasts, at the top of the company's guidance range for 5-10% adjusted profit growth.

For Goldman Sachs this growth outlook is conservative. The majority of the FY13 growth was organic but the broker expect acquisitions to contribute half of the 16% profit growth it forecasts for FY14. Management noted that premium rate growth is moderating slightly to 3-4% versus the 5% witnessed over the last two years. Hence, Goldman has erred on the cautious side and downgraded FY14 and FY15 earnings forecasts by 4% and 3% respectively, to reflect higher corporate costs and slightly lower premium rate increases. A Buy rating is retained. The stock is trading on an FY14 estimated price/earnings of 17.7 times, a 13% premium to the Small Industrials. This is a small premium for a business with strong organic growth, meaningful acquisition opportunities and relatively low economic sensitivity in Goldman's view.

 Macquarie estimates the full year's contribution of recent acquisitions, including InterRisk (77.1%), Lawson and Guardian Underwriting agencies (90%), and the 50% stake acquired in WRI brokers for $4.5m on July 1, will contribute over 5% to FY14 earnings growth. Premium funding increased 19% over FY13 reflecting a flow-through impact of acquisitions undertaken previously, coupled with the benefits arising from the deal with Hunter Premium which commenced in July 2012. Of FY13's acquisitions, InterRISK increases the company's presence in the mid market and corporate sector and should help increase the operating leverage going forward. InterRISK is anticipated to be around 3% accretive in FY14. Lawsons and Guardian are expected to be 2.3% accretive in FY14.

The stock has three Buy ratings and one Sell on the FNArena database. The consensus target price is $11.34, which compares with $10.98 ahead of the results and suggests 4.4% upside to the last share price.
 

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