Australia | Oct 11 2023
This story features STEADFAST GROUP LIMITED. For more info SHARE ANALYSIS: SDF
Steadfast Group's US acquisition is alive with possibilities, analysts suggest.
-Steadfast Group acquires ISU Group in the US
-Small initial earnings accretion, larger potential synergies
-Launching pad for further acquisitions, says Ord Minnett
-Australian advantages readily transferrable to the US
By Mark Woodruff
Insurance broker Steadfast Group ((SDF)) is entering the US market with the acquisition of ISU Group, a broker network covering around 40 US states, in a move Morgan Stanley describes as a sensible, lower risk and patient way to grow the business in America.
This small first step into the US market should ease prior investor concerns over offshore expansion, believes Jarden. The share price had weakened by close to -7% over the past two months.
Given the defensive appeal of Steadfast Group amidst an increasingly uncertain macro backdrop, and the recent fall in share price, this broker has upgraded its rating to Overweight from Neutral. Shares have been on an inexorable march higher over the past three and a half years.
Steadfast, the largest general insurance broker in Australia and New Zealand, is termed a consolidator, via equity interests in insurance brokerages, and co-ownership and consolidation of underwriting agencies and ancillary businesses.
The company has little to no exposure to underwriting risk, highlights Goldman Sachs, with revenues largely dependent on premiums written.
ISU Group has member fees and takes a share of commission from insurers, writing US$6.5bn of premiums via more than 220 members. Revenue is split fairly evenly between member payments and commission fees based on volumes and the claims ratio within the network, explains Ord Minnett.
There was little in the way of financial detail provided by management around the transaction. More information is expected at the AGM on October 27.
UBS forecasts around 1% EPS accretion for Steadfast from the deal, while Ord Minnett predicts an earnings (EBITDA) uplift of $8m, which is minor in the context of the broker’s FY24 earnings forecast for $517m.
Hence, the deal appears a little underwhelming, at first glance, in its overall impact, but does have other less apparent advantages, analysts surmise.
Because of its predilection for consolidation, Ord Minnett sees another avenue of growth for Steadfast arising from the transaction.
Formerly, ISU Group brokers on the verge of retirement or leaving sold their businesses to new owners who left the network, given management had no appetite for taking equity stakes. Now, Steadfast would be a logical buyer to keep them in the network, points out the broker.
UBS agrees and notes the recent exodus of around -10% of ISU Group’s network members has been driven by a lack of its network’s access to capital or desire to acquire network brokers.
The minor earnings contribution from the acquisition, in Jarden’s opinion, reflects the fact ISU Group does not currently own equity in its brokers.
Assuming a similar 14% commission rate, commensurate with Steadfast’s existing equity brokers, Jarden derives a revenue pool of around US$1bn across ISU brokers. Even at a lower EBITA margin of 20-30% (Steadfast 38.6% in FY23), this would imply a $300-470m per year earnings pool.
This outcome would provide a significant upside opportunity relative to the broker’s current earnings forecast of $500m for FY24.
While ISU Group offers better terms for its brokers by connecting them with insurers, it does not offer Steadfast’s technology or other support services. Risk assessment and other services will be rolled-out as a priority to enhance ISU’s value proposition, suggests Ord Minnett.
The analyst believes a fragmented US market provides a good opportunity for Steadfast to make more acquisitions and win market share by organically attracting members of other networks via a superior offering.
It’s felt the acquisition will improve Steadfast’s relationship with US carriers, some of which already partner with Steadfast in Australia.
The acquisition is being funded by a mix of debt and free cashflows and the -$86m outlay (US$55m) is at the manageable end of Morgan Stanley’s expectations.
Are Steadfast’s advantages in Australia readily transferrable to the US?
Management at Steadfast believes its underwriting agencies and technology are readily transferable to the US market.
This view applies to underwriting agencies across areas such as extending its successful CHU strata agency into the US condominium market as well as the following agencies: cyber (Emergence), heavy motor (HMIA) and machinery and plant (UAA).
Regarding technology, the company is confident the Steadfast Client Trading Platform (SCTP) will transfer to the US, as it is built to plug into other (incumbent) systems.
Goldman Sachs looks forward to the greater potential adoption of the SCTP technology, and other network services, as well as the improving buying power through group contracts.
Ord Minnett points out Steadfast Group’s increasing scale could provide better access for member brokers to global insurance markets. It’s felt the leveraging of other services like risk assessment, claims handling support and premium funding could occur quickly.
The ISU Group transaction is an initial and measured beachhead into a large and scalable market and may ultimately extend the runway of both organic growth and the insurance broker acquisition pipeline over the long-term, suggests UBS.
FNArena's daily monitoring of Steadfast Group consists of four brokers with one Buy rating and three Hold (or equivalent) recommendations. The average target price is unchanged at $6.38, which suggests just over 14% upside to the latest share price.
Macquarie is the only broker of the four yet to refresh its research following the ISU Group acquisition announcement.
Jarden (now Overweight) and Neutral-rated Goldman Sachs are not monitored daily. These brokers have an average target price of $6.00.
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