EUR 850.00 For Business Accounts Only

Morningstar | Steadfast’s 1H19 Highlights the Firm’s Attractive Earnings Growth Outlook. FVE AUD 3 Intact

No-moat general insurance broker, Steadfast Group, maintained earnings guidance for fiscal 2019 following a strong first half. Our positive view is intact and at current prices, the stock is trading close to our AUD 3.00 per share fair value estimate. Underlying cash NPAT increased an impressive 17% to AUD 50 million, just ahead of our AUD 48 million expectation. The fully franked interim dividend of AUD 3.2 cents per share, or cps, was in line, increasing 14% on the previous corresponding period, or pcp, based on 50% payout of underlying cash NPAT. Including AUD 12 million in amortisation expense, EPS increased 12% to AUD 4.8 cps. We like the strong pricing and volume growth and expect similar outcomes for several years.

The firm has done well combining organic growth with targeted acquisitions since listing in 2013. However, acquisition risk is always a concern, and overpaying for assets could result in potential future asset writedowns to the detriment of shareholders. But this is not our base case as we are confident management and the board will continue to apply appropriate care in investing shareholders funds in its long-term inorganic growth strategy.

Our full-year cash NPAT forecast of AUD 113 million excludes amortisation expense. Adjusting for amortisation of AUD 25 million, our fiscal 2019 underlying net profit after tax and amortisation is AUD 88 million, the midpoint of the unchanged guidance of AUD 85-90 million. Our fiscal 2019 underlying EBITA forecast of AUD 193 million is close to the midpoint of guidance of AUD 190-200 million. We like the strong cash flow, good organic growth in both the broker and underwriting businesses and the ongoing acquisition growth strategy. Revenue growth was strong at 23% with EBITA growth of 21% a highlight. A net AUD 94 million was spent on small bolt-on broker and underwriting agency businesses. Broker EBITA margins were steady at 29% and underwriting margins increased to 46% from 44% a year ago.

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 2.8% dividend yield or 4.0% including franking, the broker offers attractive earnings growth options. We forecast EPS growth to average 8% annually for fiscal 2020-2023. Material acquisitions remain a medium-term catalyst, but we don’t expect any in second-half 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.

Earnings guidance is subject to the usual caveats of insurers continuing to drive moderate premium rate increases, increasing contribution from the new broker platform, and ongoing investment in technology. Gearing has picked up following recent acquisitions and stands at 24%, still below the firm’s 30% maximum. The combination of unutilised debt facilities and free cash flow provide capacity to continue investing in smaller acquisitions. Corporate debt facilities totaled AUD 385 million at December 2018 with AUD 99 million unutilised. Cash and cash equivalents were AUD 115 million. Operating cashflow was AUD 62 million for the half with strong cash conversion.

First half is seasonally weaker than second half with about 44% of full-year earnings typically landing in the first half. We expect a stronger second-half underlying cash NPAT of AUD 63 million to achieve our unchanged fiscal 2019 cash NPAT forecast of AUD 113 million. Statutory NPAT increased 20% to AUD 40.5 million for the first half.

The commercial general insurance market continues to benefit from mid-single-digit premium rate increases and Steadfast continues to leverage good organic growth plus contributions from recent acquisitions. Steadfast insurance brokers benefited by an average 5% increase in premium prices compared with a year ago and CEO Robert Kelly expects the stronger pricing environment to continue for a couple of years at least. The hardening pricing market is a positive and when combined with solid volume growth underpins our strong growth earnings forecasts.

The interim result continues the strong and steady earnings growth since the firm listed in 2013 and we expect the fast-growing general insurance broker and underwriting agency business to continue to outperform for several years at least. The Steadfast network benefited from an additional 11 insurance brokers joining the group in the half, taking the total number of brokers to 388 at Dec. 31, 2018. Steadfast has equity holdings in 66 brokers that are part of the 388 strong network. We like the growing international reach with the firm’s 56 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.

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. Our forecast EPS growth reflects the attractive outlook with a 12.7% increase in EPS expected for fiscal 2019, followed by an average of 8% per year for fiscal 2020-2023.

The firm’s proprietary online insurance product access, pricing and policy fulfilment platform, known as the Steadfast Client Trading Platform, or SCTP, is expected to deliver good growth for several years as more insurers join and brokers and clients access the platform. Significant investment in the trading platform is starting to bear fruit with guidance of strong gross written premium, or GWP, growth during the next five years. Steadfast expects to be writing approximately AUD 2.3 billion of GWP via the platform in fiscal 2023 compared with just AUD 231 million in fiscal 2018 and AUD 190 million in first-half fiscal 2019. 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 contribution.

Our positive long-term view is anchored to the firm’s high proportion of long-standing and sticky SME customers, high renewal rates and high customer switching costs. The firm is focused on the intermediated general insurance market with 84% of customer in the less price sensitive SME sector. Steadfast is not a big player in the ultra-price competitive large corporate insurance market. Steadfast estimates a 28% market share of gross written premium of the Australian intermediated general insurance market.