Steadfast delivers a reassuring set of numbers
Steadfast Group (ASX:SDF) is the largest general insurance broker network and group of underwriting agencies in Australasia. It also has growing operations in Asia and Europe. Two of our funds own shares in the company, so we were eager to read its FY2018 results. Here are our initial impressions.
Three key take-outs were:
- Organic underlying EBITA growth of (+9.6 per cent)
- Underlying EBITA growth contribution from companies acquired during the period of $8.4 million (+5.9 per cent)
- Underlying EBITA margin (aggregated) of 30.5 per cent (FY17: 30.3 per cent) for equity brokers and 44.9 per cent (FY17: 42.5 per cent) for Steadfast Underwriting Agencies.
FYI: EBITA is the acronym for earnings before interest, taxes and amortization. To calculate a company’s EBITA, start with its earnings before tax (EBT), which can be found on the income statement, and add interest and amortization expenses back in.
Importantly, the company expects the insurance premium ‘rate’ cycle to strengthen further into FY2019, which is likely to be the driver of the company’s stated higher FY2019 guidance. The strengthening of rates was also a contributor to the FY2018 performance of underwriting agencies (+10 per cent organic growth, +8 per cent acquisitions).
The company’s focus remains the migration of gross written premium onto the Steadfast Client Trading Platform (SCTP). The company has previously indicated that EBITDA increases $4 million if 10 per cent of available gross written premium is transacted on the SCTP. EBITDA increases $13 million if 30 per cent of gross written premium is transacted on the SCTP.
The company is targeting circa 60 per cent of the 80 per cent that can be written on the platform. This equates to 50 per cent of gross written premium with a potential EBITDA contribution of circa $23 million. The company is targeting break-even in FY2021 on spend vs EBITA contribution.
Steadfast called out improving traction on the platform during their conference call and noted a number of underwriters have committed to the platform, including CGU, Berkley, Allianz and Zurich.
The market appears to have set expectations in line with the company’s guidance. Strengthening insurance premiums should deliver organic growth and an additional half of acquisition growth puts guidance at A$185 – A$195 million and underlying NPAT of A$82.5 – A$87.5 million. Market expectations sit at $187 million and $90 million respectively.
Steadfast is essentially expected to deliver high-single digit organic NPAT growth and the shares sit at about 22 times revised guided earnings. Of course, these numbers do depend on the assumption of a continuation of the strengthening insurance premium cycle and migration to the SCTP.
Recently, the following companies have made comments about the premium cycle:
IAG: “low single-digit general average premium growth given ongoing rate increases in short tail personal lines and further positive rate momentum in commercial classes.”
Suncorp: “in the Commercial portfolio, price increases will continue to restore profitability as the business prioritises margin over growth.”
QBE: “pricing is expected to remain firm in Australian & New Zealand Operations, albeit increasingly targeted towards poorer performing classes of business, particularly commercial property.”
AUB Group: “The hardening premium rate environment is expected to continue with more consistent pricing being enacted by insurers and average rate increases expected to move to mid-single digits for the foreseeable future.”
In the conference call Steadfast made reference to the business maturing and the need to keep investing in the business through share incentives to keep staff motivated.
The Montgomery Fund own shares in Steadfast. This article was prepared 10 September 2018 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Steadfast you should seek financial advice.