Patience Required On Steadfast

This story features STEADFAST GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: SDF

-Benefits forthcoming in FY17
-Minimal organic growth
-Cost of strategy unclear
 

By Eva Brocklehurst

Steadfast Group ((SDF)) has outlined initiatives to simplify the complicated web of technology that currrently exists across its network of insurance brokers, implementing and internalising a number of new systems. The investor briefing highlighted the company's investment in its own IT systems and the deployment of new underwriting programs.

Macquarie suggests data capture, analysis and efficient delivery are at the core of the platform advantages. Management commentary also suggested Virtual Underwriter (SVU) was gaining traction across the network and its appeal should be fostered as more underwriters join. The Insight broking platform was introduced this year, with over 170 brokers looking to deploy the software. Macquarie expects FY17 to reflect the benefits of these systems, flowing into FY18.

The company's agency business has grown via acquisition significantly, to be now over $760m in gross written premium. Yet the broker notes June is a critical month for renewals and the company's commentary signals the market in key lines is flat.

Macquarie retains a positive view on the insurance broking sector and an Outperform rating on the stock. But Steadfast is now trading at a premium to the market and Austbrokers ((AUB)), so the broker envisages limited scope for further re-rating in the near term.

Credit Suisse concurs that the earnings growth potential is underscored by the technology strategy and underwriting agencies, and also that the re-affirmation of FY16 guidance signals the ongoing difficulty of achieving more than minimal organic growth. The broker expects FY17 to be another challenging year, with upside to come in outer years.

Credit Suisse would be more comfortable if the company's confidence in its systems was backed by revenue and cost targets but these were not provided. Still, the broker acknowledges the upside opportunity, should the company's strategy go to plan. In the meantime, with near-term earnings challenging, growth is being paid for in the present. Neutral rating retained.

The broker assumes there will be an increase in the cost base in the near term, likely capitalised over time to avoid profit volatility. Moreover, despite increased efficiency and availability of brokers, minimal GWP is going through the system. Not all insurers are on the system and it may be some time before this is the case. This is when the opportunity becomes real, in the broker's view.

Ord Minnett is less concerned about the present and expects that the upside will eventually come from growth and efficiencies. The company does not charge directly for its proprietary SVU platform but is encouraging the the use of Insight as a back office management tool, for which it will charge on a cost recovery basis, in turn enhancing the take up of SVU. Ord Minnett observes this will have little direct impact on revenue but should increase the efficiency of member brokers.

The main concern for the broker is that, having taken development costs at the head office, the company is not apparently prioritising equity brokers ahead of network brokers.  Moreover, the broker considers any aggregator-type competition could be detrimental to the market.

On this subject, Credit Suisse observes the Virtual Underwriter is expected to provide more functionality for brokers and the company stresses its system is not a simple aggregator model, where the lowest price wins. The broker appreciates the difference but also understands why this could be of concern among key players in the system.

Ord Minnett remains bullish on a medium term view and retains a Buy rating. FNArena's database has two Buy ratings and one Hold. The consensus target is $2.05, suggesting 1.5% upside to the last share price. Targets range from $1.70 (Credit Suisse) to $2.35 (Ord Minnett).

Steadfast recently acquired two large underwriting agencies and is expanding the capacity of its Super Binder. There are 16 binders across 30 syndicates, utilising four brokers, and the company hopes to consolidate this into one binder, co-brokered with two brokers and only six syndicates, which can write all lines of business.

The company acquired QBE Insurance's ((QBE)) Australasian agency businesses in 2015, two of which were highlighted during the investor briefing. These are Underwriting Agencies of Australia and CHU Underwriting Agencies.

The former specialises in insurance cover for industrial and commercial plant equipment and operates in Australasia and Singapore, with aspirations to expand further in Asia. CHU is the largest residential and commercial strata insurance specialist in Australia, with its products fully underwritten by QBE.
 

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