Company Overview: AUB Group Limited, formerly Austbrokers Holdings Limited, is an Australia-based company, which is an equity-based risk management, advice and solutions provider in Australasia. The Company is principally engaged in the provision of insurance broking services, distribution of ancillary products, risk services and conducting underwriting agency businesses. The Company operates in two segments: Insurance Intermediaries and Risk Services. The Company's Insurance Intermediaries segment has equity investments in businesses, which provides insurance and risk related services to clients. The Company's Risk Services segment also has equity investments in businesses, which provide specialist risk solutions primarily in the people and workplace risk areas, and also the provision of ancillary risk assessment and related solutions in the Australian market. Risk Services are provided to insurance companies and to commercial and government clients either directly or through insurance brokers.
AUB Details
Decent Performance in FY19: AUB Group Limited (ASX: AUB) is mainly focused on insurance broking, underwriting agency, and risk management businesses. As on September 12, 2019, the market capitalisation of the company stood at ~A$823.23 million. Recently, the company released a decent set of numbers for FY19 in which its revenue and other income witnessed a rise of 12.6% to A$279.8 million while, during the same period, the company’s adjusted NPAT amounted to $46.4 million, which reflects a rise of 4.1% on a YoY basis. It was also mentioned that the consolidated NPAT witnessed an increase of 4.0% and stood at $48.4 million in FY19 as compared to $46.5 million in FY18 mainly because of the growth throughout all core insurance operations. The company’s CEO and Managing Director named Mike Emmett stated that FY19 was a challenging year, and there was a number of highs which were counterbalanced by some of the significant lows. The company’s Insurance Broking and Underwriting businesses in ANZ has delivered good organic growth supported by the positive impact of increased shareholding in several brokers, like Adroit in Australia and BWRS in New Zealand. However, the performance got partially offset by Canberra Fraud event. Based on the performance in FY19, the Board of Directors declared a fully franked final dividend of 32.5 cents per share. This summarized a total dividend payment of 46.0 cents per share (fully-franked) for full-year, which represents a payout ratio of 72.9% on adjusted NPAT basis and an increase in the full year dividends of 1.1%. The final dividend will be paid on 8 October 2019. The company’s net assets as at June 30, 2019, amounted to $483.4 million while in FY18 the figure stood at $357.2 million. During FY19, the company acquired the controlling interests in 4 entities, which were previously accounted for as associates, that resulted in an increase in the total assets and liabilities. The compound annual growth rate in the earnings per share from FY10 to FY19 on the adjusted basis stood at 6.1%, which can be considered at decent levels. Going Forward, the company will continue to grow its core broking businesses and expand its underwriting agencies in Australia which might support it to drive organic growth in years to come. Hence, considering the decent track record of delivering growth coupled with respectable return ratios and paying dividend consistently to its shareholders, we have valued the stock using three and half year average P/E market multiples of 17.73x for FY20E with consensus EPS of $0.66 and have arrived at a target price upside of single-digit growth (in percentage terms). At CMP of $11.23, the stock of the company is trading at P/E multiple 16.96x of FY20E EPS.
Key Financial Highlights (A$ Mn) (Source: Company Reports, Thomson Reuters)
Top 10 Shareholders: The following table provides a broader overview of the top 10 shareholders in AUB Group Limited:
Top 10 Shareholders (Source: Thomson Reuters)
Higher Key Margins Than Industry Median: The key margins of AUB Group Limited are higher than the industry median and, thus, it can be said that the company is possessing decent fundamentals. The company’s net margin stood at 17.6% in FY19, which is higher than the industry median of 5.1% and, therefore, it looks like that AUB’s capabilities to convert its top-line into the bottom-line are better than the broader industry. Further, in FY19, the company’s EBITDA margin stood at 16.5%, which is higher than the industry median of 12.4%. The company’s return on equity (or RoE) stood at 13.7% in FY19, which is higher than the industry median of 10.3% and, thus, it can be said that the company has been delivering decent returns to its shareholders when compared to the broader industry which could help it in attracting attention of the market players. The company’s Debt/Equity ratio stood at 0.25x in FY19, which implies a fall from FY18 ratio of 0.42x and, therefore, it looks like that the company has been deleveraging its balance sheet. Generally, the deleveraged balance sheet reflects stability and could help the company is tapping growth opportunities which might arise. Additionally, the percentage long-term debt to total capital stood at 14.5% in FY19 while in FY18 it was 23.5% and, thus, it can be said that the company’s exposure towards the long-term debt has decreased.
Key Metrics (Source: Thomson Reuters)
Understanding Performance of Insurance Intermediaries Division: The profits of Australian Broking business witnessed a rise of 3.7% and stood at $52.8 million in FY19. The current year result also includes an increased profit contribution from the increased interest in the Adroit effective July 1, 2018, as well as several smaller acquisitions and mergers by the partner businesses. The organic growth was witnessed via client policy premium growth and improvement in margin.
The profit of New Zealand Broking rose 41.5%, and the figure stood at $9.2 million in FY19 mainly because of an increased interest in the BWRS effective January 1, 2019. It was also mentioned that the acquisition expansion opportunities remain robust, and there is a continuation in investment in the people, processes and infrastructure (including technology) as the business expands.
Reconciliation of Operating Segments (Source: Company Reports)
Overview of Underwriting Agencies and Risk Services Businesses: The profit of Underwriting Agencies business encountered an increase of 11.6% and stood at $15.5 million in FY19, in context of significant revenue growth in a number of agencies. However, the profit of Risk Services business has witnessed a fall of 66% and stood at $2.4 million, and this was because of the reduced business volumes and excess service capacity in Altius and Allied.
A Brief Overview of Cash Flows: As per the reports, the company has generated positive cash flow from operating activities before the customer trust account movements amounting to $54.2 million while in 2018 the figure stood at $46.2 million. The cash flows used in investing activities witnessed an increase in FY19, mainly because of increases in the shareholdings in controlled entities. It was mentioned that cash flows from financing activities have increased on a YoY basis because of the equity capital raising partially offset by the partial repayment of the group borrowings.
Consolidated Cash Flow Statement (Source: Company Reports)
There was a decrease of $16.7 million to $104.5 million in the interest-bearing loans and borrowings, which was because of partial repayment of the corporate debt facility.
An Update on FY19 final Dividend : As was announced by the company on August 20, 2019, the Board of Directors declared a final dividend for FY19 amounting to 32.5 cents fully franked and reinstated Dividend Reinvestment Plan (or DRP). The company has announced a suspension of the DRP in the month of August 2016, and last dividend that the DRP applied to was paid in the month of April 2016. As per the DRP Rules, the company was required to pay the shareholders participating in DRP any residual funds held in their DRP accounts and provide them with individual Plan Accounts upon suspension of DRP. The release stated that those actions have not been completed yet because of an administrative oversight but are now being completed (and those shareholders would be receiving interest at 10% per annum to account for time delay).
Capital Management: The company’s objectives with respect to managing capital revolves around safeguarding the ability to continue as a going concern to provide returns to the shareholders and benefits for other stakeholders and to maintain the optimum capital structure. To maintain or adjust the capital structure, it may adjust the amount of the dividends paid to shareholders, issue the new shares or sell the assets in order to reduce debt if required. During 2019, the company’s strategy was the maintenance of the gearing ratio of not more than 30%, and this was unchanged from 2018. With respect to dividends, it was mentioned that the fully franked interim dividend on the ordinary shares for the year to June 30, 2019, amounting to 13.5 cents per share was paid to the shareholders on April 5, 2019. As a result, this dividend totalled $9,922,875. On August 20, 2019, the Board of Directors declared a fully franked final dividend of 32.5 cents per share, which will be paid on October 8, 2019. Considering the issued shares of 73,502,778 shares, this dividend would be totalling $23,888,402.
Over the last ten years, the company has consistently distributed dividends with decent payout ratios in the range of 58.4% to 72.9%. The annual dividend yield of the company is about 3.87% on a five-year average basis (FY15-19). Currently, the annual dividend yield of the company happens to be at 4.11%, which is slightly higher than the industry median of 3.9% (Insurance), showing better income to its shareholders as compared to the peer group. This might help in attracting the attention of dividend-seeking investors.
Decent Dividend History (Source: Company Reports)
What to Expect from AUB Moving Forward: AUB Group Limited and broader insurance market gained from the pricing tailwinds in the span of past few years and the company expects this to continue, although, at the slower rate. During FY20, the company is expecting robust growth from the Insurance Broking in Australia and New Zealand and the Underwriting Agencies. This would be reduced by the factors, and some of them are reduced interest rates, lease accounting changes as well as lag to benefit from the cost-out activities.
The company’s guidance for the adjusted net profit after tax growth for FY20 in the range of 4%- 6% (from FY19 comparative base of $46.4 million) includes the estimate of $1.5 million to $2.0 million (post-tax) of one-off major acquisition legal and financing costs. It was mentioned that, adjusting for the costs, the guidance would be increased to the range of 8%- 10% growth.
The company has also provided certain information related to the strategic priorities for FY20, which mainly includes reducing the corporate costs and drive efficiency via cross-network synergies, executing on the strategically aligned acquisitions which drive outperformance and redefining Risk Services strategy.
Key Valuation Metrics (Source: Thomson Reuters)
Historical PE Band (Source: Thomson Reuters)
Stock Recommendation: The stock of AUB has fallen 13.65% in the span of the previous 6 months while, in the time frame of the past three months, it witnessed a fall of 0.18%. As per ASX, the company’s stock is trading marginally lower than the 52-week low high average and, thus, it can be said that the current trading levels are offering a decent opportunity for accumulation. As per ASX, the company’s annual dividend yield stood at 4.11%, which is slightly higher than the industry median (Insurance) of 3.9%.
The company’s strategic plan involves the expansion of its existing portfolio in order to drive further organic growth as well as a continued disciplined approach towards M&A activity. Its plan also revolves around improving the partners’ ability to win in the market by delivering the market-leading broker value proposition. Hence, considering the decent track record of delivering growth coupled with respectable return ratios and paying dividend consistently to its shareholders, we have valued the stock using three and half year average P/E market multiples of 17.73x for FY20E with consensus EPS of $0.66 and have arrived at a target price upside of single-digit growth (in percentage terms). Based on the foregoing, we give a “Buy” recommendation on the stock at the current market price of A$11.230 per share (up 0.268% on 12 September 2019).
AUB Daily Technical Chart (Source: Thomson Reuters)
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