EUR 850.00 For Business Accounts Only

Morningstar | Steadfast's Growth Outlook Underpinned by 'InsurTech' Initiatives; FVE AUD 3 Unchanged. See Updated Analyst Note from 18 Jul 2018

No-moat-rated general insurance broker Steadfast Group's recent annual investor day confirmed our positive long-term view on the fast-growing business. A highlight was the roll out of the Steadfast Client Trading Platform, or SCTP, delivering financial and operational benefits to insurers, brokers, and clients in the company's network. The implementation of this and other initiatives support our five-year CAGR EPS growth forecast of 11.6% and AUD 3.00 fair value estimate. At current prices, the stock is mildly undervalued, trading 6% below our valuation.

Steadfast reports fiscal 2018 earnings on Aug. 24, and we forecast a AUD 101 million cash profit implying 16% growth. Based on an approximate 60% cash profit dividend payout, the growth stock trades on a forecast fully franked dividend yield of 2.8% for fiscal 2018 and 3.2% for fiscal 2019. We forecast a total of AUD 8 cents per share in fully franked dividends for the fiscal 2018 and AUD 9 cents for fiscal 2019. The first-half/second-half target dividend split is 40%/60% and we forecast a final fully franked dividend of AUD 5.2 cents per share.

Longer term, we expect increasing uptake of the new SCTP platform, stronger market conditions, increasing operating efficiency, and improved insurance pricing to justify our positive view. Large-scale acquisitions could be the catalyst for further upside. Profits are seasonal with approximately 45% of annual profits reported in the first half and 55% in the second half. We are forecasting cash profits of AUD 58 million for second-half fiscal 2018, up 35% on the AUD 43 million for first half. Steadfast estimates 80% of its network gross written premium, or GWP, can potentially be transacted through the SCTP. Steadfast has a good track record of delivering its technology strategies, providing confidence the firm can deliver on its target of achieving 60% of the 80% addressable GWP in the next five years.

Success for the high tech SCTP platform could potentially result in increased dividends from Steadfast's equity stakes in its stable of insurance brokers, as well as increased fees from sales growth and SCTP utilisation. We are confident the technology strategy will drive benefits from the systems cloud-based architecture that include improved scalability, cost savings, product innovation, and data analytics.

Steadfast provides attractive earnings upside due to strong customer relationships, market-leading technology and to-date, a proven acquisition strategy. We expect increasing broker numbers to support volume growth and leverage improved market-pricing conditions. A solid recovery in insurance pricing in the June renewal period will be a positive catalyst and provide further evidence that the stronger insurance pricing environment will support our medium-term earnings forecasts. We expect to see confirmation of the firming pricing cycle when Steadfast reports fiscal 2018 results. The risk for the no-moat firm is that some of these benefits will be competed away.

In our view, Steadfast's long and successful track record acquiring and integrating broking businesses reduces the risk of future mis-steps in the execution of its acquisition growth strategy. But despite potential upside, the growth strategy still carries risk, particularly from overpaying for assets and failing to integrate acquisitions smoothly. But we are confident management's disciplined approach will continue, with most acquisitions to come from within the firm's broker network or from long-term partners.

The underwriting agency business continues to benefit from the ongoing construction strength within Australia's economy, both on the residential and commercial sides. Consequently, Steadfast's property and business lines have been particularly strong, and we expect more of the same during the next two years at least. Steadfast's underwriting agency group increased its GWP by 16% in first-half fiscal 2018, driven by price, volume, and acquisition growth. The underwriting agency group is the largest group in Australasia with 25 insurance underwriting agencies.