Steadfast’s Long March

Australia | Jul 02 2024

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

Insurance broker Steadfast is taking a measured, longer term approach to domestic and international expansion, organically and inorganically.

-Steadfast investor day outlines growth strategy
-Opportunity in the US, beginning with ISU acquisition
-Trapped capital can be released for M&A
-Analysts applaud steady approach

By Greg Peel

Insurance broking service Steadfast Group ((SDF)) is a company that has been meticulously managed by a seasoned team, Ord Minnett declares. Ord Minnett is not alone, with Barrenjoey calling the company a well-run organisation, driven by a senior management team with vast industry experience. There is no disagreement elsewhere.

Steadfast last week held an investor day that underscored the potential for sustained earnings growth over the medium term. The company, often perceived as a one-man operation with earnings tied to the commercial lines premium cycle, notes Ord Minnett, demonstrated it is much more than that.

Having grown to be a dominant service in Australia, Steadfast has more recently looked across the ocean. Management has been investigating options to expand in the US over the past five years, with a more concerted effort over the prior 18 months, and last October selected South Carolina-based ISU Group after narrowing the field.

ISU is located across 40 states and has partnerships with over 75 insurance carriers and wholesalers. Steadfast acquired the company for -$86m.

The investor day provided a glimpse into the company’s strategic approach to acquisitions and growth opportunities. There are significant opportunities on the horizon, both domestically and internationally, and Steadfast’s measured approach to capitalising on these opportunities is commendable, suggests Ord Minnett. The company’s prospects for structural growth extend beyond the next 3-5 years.

Indeed, quite well beyond.

Bagging the Elephant

The size of the US broker market is US$213bn versus US$24bn in Australia, Morgan Stanley notes. The broker sees at least three avenues for growth.

One is growing the ISU network. It now has 233 members, up from around 225 at the October acquisition. Second is only 30% of ISU’s gross written premium (GWP) volume is via master agreements generating revenues for ISU, with substantial opportunity to increase this. These are both capital-light options. Growing ISU may require some investment in technology and analytics, Morgan Stanley notes, but Steadfast emphasised ISU can reinvest to self-fund its growth.

The third growth avenue is Steadfast making additional US acquisitions.

The North America expansion strategy is still being evaluated, and remains a medium to long term goal. The US offers favorable market dynamics, Goldman Sachs points out, being its large market size, a technology modernisation opportunity in Steadfast’s view, and a fragmented agency market presenting opportunity for consolidation. The short term focus nevertheless remains on growing the ISU network organically and supporting members.

Release the Hounds

Market concerns around Steadfast’s shrinking domestic acquisition runway were alleviated at the investor day, which outlined the potential to acquire a further $435m of earnings. Plenty of runway is on offer given the extent of “trapped capital” in Australia. (Capital not currently being deployed for any specific purpose.)

Brokers agree the $435m figure implies around -$4.4-4.5bn investment in M&A at a 10x historical acquisition multiple. At the current run-rate of spend (around $280m/pa), this would take some 15 years to exhaust, UBS estimates. The growth runway is long, this broker notes, and provides a strategic M&A pipeline at attractive multiples.

With regard growth offshore, Steadfast has bolstered its executive team to spearhead its international expansion, with the US$6bn GWP ISU network the centrepiece, reminiscent of a younger Steadfast pre-IPO, UBS suggests. Whilst there is an abundance of opportunities to further monetise network economics, and to embark on trapped capital plans (albeit at higher multiples in the US at around 12x), this appears to be a slower burn. In particular, notes UBS, technology solutions are still in the process of being evaluated.

Closer to Home

Morgan Stanley believes underwriting agencies or Managed & General Agents (MGA) offer powerful growth options and extend a broker’s ecosystem. Steadfast stated its MGAs or underwriting agencies are growing GWP at double the pace of its insurer-led capacity; 19.1% versus 9.1%. Nonetheless, insurance stands out with potential to grow in direct Home & Contents beyond the company’s original Queensland footprint to expand nationally.

Steadfast also highlighted APRA’s upcoming operational risk standard (July 2025) could incentivise MGAs to join a larger group to handle increased compliance.

Morgan Stanley does warn of ACCC developments targeting serial or “creeping” acquisitions.

The investor day indicated that, while not intending to alter its current decentralised model, Steadfast highlighted the potential to leverage its broader network and the improved efficiency of its network and equity-owned brokers. The investor day was not about setting lofty long-term revenue and margin targets, but rather about highlighting the initiatives currently underway that suggest some group earnings margin opportunity in the near term.

Thumbs Up

Analysts liked what they heard. Barrenjoey summed up the general view in suggesting “We support the slow and measured approach that Steadfast takes to acquisitions and growth opportunities, with significant opportunities currently in play both domestic and globally”.

Barrenjoey maintains an Overweight rating and sees an ongoing structural growth opportunity for the next 3-5 years or more, raising its target price to $6.95 from $6.85.

Despite the sharp increase in Steadfast’s share price recently (up some 14% since the mid-June trading update), Ord Minnett maintains a Buy rating. This broker continues to see upside to consensus forecasts and a medium-term opportunity for 10-15% annual earnings per share growth at a valuation that is currently far from demanding. A target of $6.85 is retained.

UBS retains its Buy rating and $6.85 target.

Morgan Stanley is not as convinced of a “far from demanding” valuation, suggesting Steadfast is “not cheap”, but the broker does note its scarcity value is growing. Morgan Stanley sticks with Equal-weight, raising its target to $6.17 from $6.10.

Goldman Sachs similarly sticks with a Neutral rating and $6.10 target.

Having updated earlier in June, but not for the investor day, Macquarie the only other broker monitored daily by FNArena covering Steadfast, suggested at the time the ability to maximise returns on a US roll-out is key to long-term, and believed management can “thread the needle”.

Macquarie has an Outperform and $6.70 target.

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