Small Caps | Feb 27 2014
-Seasonality stronger than expected
-Second half expected to be better
By Eva Brocklehurst
Insurance broker network, Austbrokers ((AUB)), broke with tradition after the first half results. There was no upgrade to forecasts. Brokers remain comfortable with the fact that, although commercial markets may be softening and acquisition prospects are less likely, the company has a solid business base to withstand the pressures.
Goldman Sachs retains a Buy rating and thinks the current multiples undervalue the stock's organic growth, acquisition prospects and the relatively low sensitivity to the economic climate. The broker liked the margin uplift from organic growth. Several factors that depressed earnings in the first half are expected to stabilise or reverse in the second half. These include a levelling off in the pace that interest rates decline, a bias to the second half for recent acquisitions, which tend to break even or generate small first half losses, and stabilising of the reduction in earnings from the weaker mining sector. The broker expects corporate costs, which were up 12% in the half, should now track business growth.
UBS, too, believes that while there is an increased skew to the second half in terms of profits, the upper end of the company's guidance for 5-10% growth remains achievable for the full year. Hence, the broker sticks with a Buy rating. The main disappointment in the first half came from the broking division, where revenue growth was outdone by expenses. UBS considers organic growth may be more challenging now in an increasingly competitive commercial market. Still, the company has consistently grown earnings at above 10% for the last several years and the broker sees no reason why this should not continue over the medium term.
Macquarie observes the seasonality in the acquisitions that were made at the end of FY13, notably InterRISK, has been greater than expected. InterRISK contributed a small loss to the interim result. The slowing in Western Australian mining activity also affected the result from one large broker, contributing to around a 4% reduction to profit growth. The recent Procare acquisition represents a move outside insurance broking and underwriting agencies but Macquarie believes the acquisition is complementary. Procare is a full workers compensation support service that will provide cross-selling opportunities for the network to clients and insurers. The $10m acquisition is expected to be around 1.5% accretive on a full year basis.
Macquarie suspects the lower interest rates, investment in corporate functions and lower profits from the WA broker will make upgrades hard to achieve but also believes, with a better second half from InterRISK, the top end of guidance can be achieved. As the business is high quality the broker is happy with an Outperform rating.
BA-Merrill Lynch is also on the Buy side and a believer in the growth story, flagging the company's history of conservative guidance. The broker expects both InterRISK and Procare should contribute to improvement in the second half. Merrills likes the Austbrokers business and finds it quite resilient, despite the risks from competition and the economic cycle. There are headwinds, of course – lower cash rates and flat or falling premium rates, as well as a higher expense base. Still, the broker thinks the proven business model will prevail.
There are three Buy ratings on the FNArena database with the consensus price target of $11.78 suggesting 10.3% upside to the last share price. This compares with $11.49 ahead of the results. Targets range from $11.60 to $12.00.
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