EUR 850.00 For Business Accounts Only

Morningstar | Steadfast Upgrades FY19 Earnings Guidance at AGM. FVE AUD 3 Unchanged. See Updated Analyst Note from 17 Oct 2018

No-moat-rated insurance broker, Steadfast Group, modestly upgraded earnings guidance for fiscal 2019 at the firm’s AGM. The commercial general insurance market is benefiting from mid-single-digit premium rate increases and Steadfast continues to leverage good organic growth plus contributions from recent acquisitions. Our positive view is intact, and at current prices, the stock is trading close to our AUD 3.00 per share fair value estimate. We increase our fiscal 2019 cash earnings forecast by just 2% to AUD 113 million as we were already at the higher end of guidance issued with the release of fiscal 2018 results on Aug. 24, 2018.

Our cash NPAT numbers exclude amortisation expense. Adjusting for our forecast fiscal 2019 amortisation expense of AUD 25 million, our fiscal 2019 underlying net profit after tax and amortisation forecast is AUD 88 million, the midpoint of upgraded guidance of AUD 85-90 million. Our fiscal 2019 underlying EBITA forecast of AUD 193 million is towards the lower end of upgraded guidance of AUD 190 million to AUD 200 million. Guidance is subject to the usual caveats of insurers continuing to drive moderate premium rate increases, increasing contribution from the new broker platform, known as Steadfast Client Trading Platform or SCTP, and ongoing investment in technology.

We were not surprised by the strong first-quarter trading update with good organic growth supported by approximately AUD 90 million of acquisitions either completed or close to completion. Debt capacity has increased by AUD 100 million to AUD 385 million with over AUD 100 million available to fund future growth. The trading update highlights why we like the fast-growing general insurance broker. Growth opportunities abound, but execution risk remains high. Future earnings growth is supported by an expanding broker network, modest organic growth, productivity improvements and acquisitions.

We like the growing international reach with the firm’s 53 brokers in New Zealand and Asia and the 40% stake in a leading global insurance broker renamed “unisonSteadfast” and its 200 plus brokers in 130 countries. Significant investment in the trading platform is starting to bear fruit with guidance of strong growth during the next five years. Steadfast expects to be writing approximately AUD 2.3 billion of gross written premium via the platform in fiscal 2023 compared with just AUD 230 million in fiscal 2018. Based on a 1% platform EBITA margin, Steadfast expects group EBITA to increase by approximately AUD 23 million annually from fiscal 2023 with the firm budgeting for a small EBITA contribution in fiscal 2019. Our forecast group consolidated EBITA of AUD 170 million for fiscal 2019 includes a modest platform uplift.

Our positive long-term view for the no-moat insurance broker is based on good revenue and earnings growth anchored to the firm’s high proportion of long-standing and sticky SME customers, high renewal rates, and high customer switching costs. Higher insurance pricing reflects stronger business conditions and the preparedness of insurance companies to increase profit margins and move away from unsustainable low pricing. But competition remains tough and there is still plenty of insurance capacity in the market, so we expect a modest but sustained upturn in pricing across the broader market in the next few years. Steadfast specialises in niche insurance categories and should benefit from higher rates in these subsectors including public liability and small business.

If achieved, our fiscal 2019 cash profit forecast of AUD 113 million will be 16% higher than fiscal 2018, but EPS will grow at a lower but still impressive 13% due to the expanded share count. Before the guidance upgrade consensus cash profit estimates for fiscal 2019 of AUD 111 million was broadly in line with our previous forecast. Cash profit is underlying net profit aftertax but before amortisation and significant items. Based on the seasonal profit split of 42%/58% first half/second half, we expect a cash profit of approximately AUD 48 million for the December half.

Based on a 40%/60% interim/final dividend split, we expect an interim dividend of AUD 3.4 cents per share fully franked when first-half fiscal 2019 results are released in February 2019. The dividend payout target of 65%-85% of underlying reported net profit or at least 50% of cash profit is unchanged. Our AUD 8.5 cents per share total dividend forecast for fiscal 2019 is based on a 60% payout of cash profits or 77% of underlying profit after amortisation expense. Despite the relatively low 3.0% dividend yield or 4.3% including franking, the broker offers attractive earnings growth options. We forecast EPS growth to average 9% annually for the next five years.

Material acquisitions remain a medium-term catalyst, but we don’t expect any in fiscal 2019. Lower-risk, smaller bolt-on acquisitions continue to feature--these are typically independent brokers already accessing the Steadfast network. Despite expected strong top line growth, there are lot of moving parts to the expanding Steadfast Group, which translates into high execution risk.