Steady as she goes
Few Australian management teams and their boards have been successful over long periods of time in ‘rolling’ up businesses under one roof. Inevitably, too much is paid; they struggle to deploy systems to drive scale and efficiencies; and retaining key management becomes a key problem once their lock-in period expires. It’s why we are so cautious of business strategies that revolve largely around acquisitions to grow the business. While it is easy to ‘grow’ by simply purchasing another business’ earnings, unless the return on the equity employed remains stable or improves, such capital allocation decisions will erode shareholder wealth over time.
One company that has successfully incorporated acquisitions in its business model is Austbrokers, an insurance business which manages a network providing brokerage and underwriting services.
Management have done an exemplary job steadily growing the company since it was established in 1985. Over the last 5 years, profit has grown at an annual rate of 15%, while Return on Equity has increased to 17%.
The insurance market remains highly fragmented with the largest competitor to Austbrokers holding just 5.6% market share. Austbrokers has captured 1% of the market over a long period of time which means there is no shortage of growth levers to pull (read as: ‘consolidation can occur’). In addition to this, the sector provides steady business performance over the economic cycle as companies and individuals need to insure their assets in both booms and busts.
Coupled with the fact that Austbrokers is not a typical insurer, it is able to receive exposure to insurance premium cycles without the associated risk.
Potential upside with a lot less risk is exactly how we like to invest.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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