EUR 850.00 For Business Accounts Only

Morningstar | Steadfast's Solid FY18 Profit Supports Attractive Growth Profile. FVE Maintained at AUD 3.00

No-moat Steadfast Group's fiscal 2018 cash earnings of AUD 97.3 million was 3.5% below our forecast, but still up a healthy 11.6% on fiscal 2017. The final fully franked dividend of AUD 4.7 cents per share, or cps, took total dividends for the year to AUD 7.5 cps, up 6.8% based on a 79% payout. Despite a modest fully franked dividend yield around 3%, the firm offers attractive earnings growth upside due to a strong underlying growth profile. The stock is fairly valued, trading broadly in line with our unchanged AUD 3.00 valuation.

Following the modestly softer-than-expected fiscal 2018 performance, we've trimmed forecasts to reflect the higher amortisation and tax rate assumptions. Our fiscal 2019 underlying EBITA forecasts of AUD 190 million and underlying NPAT of AUD 86 million sit in the middle of the guidance range. Our positive long-term view is unchanged, based on resilient revenue and earnings due to the firm's high proportion of longstanding small- to midsize enterprise customers, high renewal rates, and high customer switching costs.

We expect EPS growth to average an impressive 9.4% per year over the next five years based on solid revenue growth from the existing businesses, the recent acquisitions, the unisonSteadfast business, and other equity broker investments. Additionally, significant investment in technology drives rapid improvement in productivity. The combination of good top line revenue growth and a more efficient cost base will deliver forecast net margin improvement and consequently EPS growth.

Solid performance of the firm's equity investments in brokers and underwriting agencies, and improved insurance pricing continues to support earnings growth with gross written premium, or GWP, reaching a record AUD 5.3 billion in fiscal 2018. The approximate AUD 300 million or 6% increase in network broker GWP compared with a year ago was sourced 3% from organic growth, 1% from new equity brokers, and 2% from additional authorised representatives.

Management describes the balance sheet as strong with net assets of AUD 1 billion, but goodwill and identifiable intangible assets account for the vast bulk of net assets. The balance sheet is strong if the goodwill and intangible assets stand up to the annual audit valuation test. Strong operating cash flow was a key highlight with AUD 96 million or 99% of cash earnings converted into cash. Balance sheet cash of AUD 77 million combined with the AUD 109 million unutilised corporate debt facilities support future acquisitions and dividend payments. Total group gearing of 17.5% was well within the firm's maximum ratio target of 30%. The corporate gearing ratio, or corporate debt/corporate debt plus equity, cap of 25% was not troubled, remaining steady at 14%.

The key long-term strategy is to grow the business through acquisitions. Despite potential upside, the growth strategy carries risk, particularly from overpaying for assets and failing to integrate acquisitions effectively. Potential future goodwill writedowns would damage the stock's high P/E ratio, currently around 21 times, causing shareholder value destruction. But this is not our base case as 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.

Steadfast's underwriting agency group increased its GWP by an outstanding 18% to AUD 914 million from AUD 777 million in fiscal 2017, driven by price, volume and acquisition growth. Property and business lines were particularly strong, and we expect more of the same during the next two years at least. The underwriting agency group is the largest group in Australasia with 25 agencies.