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 FY19 Performance Amidst Certain Challenges: AUB Group Limited (ASX: AUB) is focused on insurance broking, underwriting agency and risk management businesses. As on November 14, 2019, the market capitalisation of AUB Group Limited stood at ~A$844.97 million. Amidst certain challenges, the company reported a decent set of numbers for the period ended June 30, 2019, wherein net profit after tax increased by 4.0% to $48.4 million as compared to the prior year. It was mainly driven by decent growth across the core insurance operations in FY19. Though the company witnessed a challenging year, its insurance broking and underwriting businesses in ANZ posted good organic growth because of the positive impact of increased shareholding in several brokers, primarily Adroit Holdings in Australia and BWRS Ltd in New Zealand. The group operates through two main segments- (a) insurance intermediaries and (b) risk services, which contributed revenue around 81.5% and 18.5%, respectively of the total revenue as at 30 June 2019. The balance sheet of the company is well-placed, and it would continue its strategy, which revolves around disciplined acquisitions and supporting partner businesses in order to improve their underlying performance.

The company continues to be prudent in managing capital, with the Group gearing ratio reducing to 22% in FY19. The group’s strategic plan revolves around the expansion of the existing portfolio with the help of continued focus towards acquisitions and driving organic growth with the help of further investment in the broker value proposition to improve the partners’ ability to serve clients. On account of decent performance in FY19, the Directors of the company managed to declare a fully franked final dividend of 32.5 cents per share, which was payable on October 8, 2019. When it gets combined with an interim dividend amounting to 13.5 cents, the full-year dividend comes out to be 46.0 cents, which reflects net earnings payout ratio of 73%. The company’s dividend per share has witnessed a CAGR growth of 8% between the time span of FY10- FY19 and, therefore, it can be said that AUB managed to declare decent dividends across the economic cycles. Notably, the company’s adjusted EPS encountered a CAGR growth of 6% during the same time span. Based on the foregoing, we have applied a relative valuation method, i.e., P/BV multiple and arrived at a target price of lower double-digit growth (in % term).

The company’s focus towards optimising the network portfolio and reducing the corporate overheads are expected to act as tailwinds for long-term growth. Its FY20 execution priorities primarily revolve around implementing the best-in-house technology features throughout the group, consolidating the core businesses for scale and create sector specialisations to build the market leadership and redefining the Risk Services strategy.


Key Financial Highlights (A$ Mn) (Source: Company Reports, Thomson Reuters)

Decent Footing with Respect to Key Margins: The company’s net margin stood at 17.6% in FY19, which is higher than the industry median of 5.1% and, therefore, it can be said that AUB has decent capabilities to convert its top-line into the bottom-line. Operating margin stood at 12.2% in FY19, which is higher than the industry median of 10%. AUB’s RoE stood at 13.7% which is higher than the industry median of 10.1% and, thus, it can be said that AUB has delivered better returns to its shareholders in FY19 as compared to the broader industry, which might help it in gaining traction among the market participants.

Debt/Equity ratio stood at 0.25x in FY19, which reflects a fall from FY18 figure of 0.42x and, thus, it can be said that AUB’s balance sheet has been stabilised from the past year. The stabilised balance sheet might help the company in achieving long-term growth prospects. Generally, lower debt on the balance sheet gives an opportunity to focus on their objectives.


Key Metrics (Source: Thomson Reuters)

Announcement About Appointment of Company Secretary: AUB Group Limited has made an announcement about an appointment of Ms Freya Smith to the post of Group General Counsel and Company Secretary, that became effective from November 4, 2019. Ms Smith would be replacing Mr David Franks, who would resign as the Company Secretary effective from the date of appointment of Ms Smith. It was further added that Mr Allan Luu would remain as additional Company Secretary.

Key Takeaways From AUB’s AGM Presentation: AUB Group Limited has recently released its AGM presentation in which the company shed light on its financial overview. The company has stated that it has been effectively leveraging and managing debt. Therefore, it can be said that the company’s balance sheet might get more stabilised and provide headroom for further growth. The company’s leverage ratio at the end of FY19 stood at 1.5x, which reflects an improvement from FY18 figure of 1.8x. The following image could be considered in this regard:


Group Leverage Ratio (Source: Company Reports)

It can be said that the company has been focusing on reducing its leverage ratio since FY16, as the trend shows that it has been declining towards the average, which is 1.45x. With respect to M&A, it stated that AUB undertook 54 acquisitions and bolt-ons in the span of the previous six years, which have been valued at around $250 million. The company has the intention to continue to supplement organic growth via relevant acquisitions and start-up opportunities.

Reduction in Gearing Ratio: The company has been prudent in managing its capital, and the group’s gearing ratio reduced to 22% in FY19, which is below the Board mandated maximum which is of 30%. The business has robust ongoing cash flow generation from the investments in the partner businesses. It was mentioned that the corporate entity is having access to cash as well as long-term corporate debt facilities in order to finance future acquisition and initiatives for organic growth.

Focus on Shareholder Returns Remains Intact: Based on the performance in FY19, Directors of the company has declared a fully franked final dividend of 32.5 cents per share, which was paid on October 8, 2019. If this dividend gets added to an interim dividend amounting to 13.5 cents, the full-year dividend comes out to be 46 cents. It equates a dividend payout ratio of 72.9% on adjusted NPAT, which is the highest since FY10. The following image provides an idea that AUB has been prioritising shareholder returns:


Shareholder Returns (Source: Company Reports)

Update on FY19 Final Dividend: The Board of AUB Group Limited has declared a final dividend for FY19, which amounted to 32.5 cents fully franked, and also reinstated the Dividend Reinvestment Plan (or DRP). The company has made an announcement about suspension of DRP in the month of August 2016, and the last dividend that the DRP applied to was paid in the month of April 2016. Under DRP Rules, the company was required to pay shareholders participating in DRP any residual funds which are held in their DRP accounts and provide them with their individual Plan Accounts upon the suspension of DRP.

What to Expect from AUB Moving Forward: The company’s guidance for adjusted net profit after tax growth for FY20 of 4- 6% (from FY19 comparative base of $46.4 million) includes estimate amounting to $1.5 million to $2.0 million (post-tax) of the one-off major acquisition legal as well as financing costs. However, after adjusting for the costs, the guidance will be increasing to 8- 10% growth. The company stated that FY20 would be an important year for AUB. In FY20, the group would be delivering benefits to the customers and partners, while at the same time, it would also complete remediation of Risk Services, reduce the overhead costs as well as address any other under-performing elements of the portfolio. This would be positioning the company for accelerated growth.

The strategic agenda of the group primarily involves 1) expansion of the existing portfolio via focus towards acquisitions, with the pipeline of robust M&A opportunities. The balance sheet is well-placed, and it would continue the strategy of disciplined acquisitions, 2) driving organic partner growth with the help of further investment in the broker value proposition to improve the ability of partners to serve the clients.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: P/B- Based Valuation

P/B- Based Valuation (Source: Thomson Reuters), *NTM: Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters.

Stock Recommendation: The company’s cash from operating activities has witnessed a CAGR growth of 11.88% in FY15-FY19 and, therefore, it can be said that AUB has decent operational capabilities. During the same time period, AUB’s cash receipts encountered a CAGR growth of 9.08% and, thus, it can be said that AUB is possessing respectable capabilities to generate cash. AUB’s total revenue has witnessed a CAGR growth of 9.21% between FY15- FY19 and, therefore, it can be said that the company possesses decent capabilities to garner revenues. Considering the decent balance sheet position, focus towards shareholders returns, decent capabilities to garner revenues, and respectable growth in dividends (since FY 2010), we have valued the stock, using a relative valuation method, i.e., P/BV multiple, and arrived at a target price of lower double-digit growth (in % term). Hence, we recommend a “Buy” rating on the stock at the closing price of $12.12, up 5.852% on 14 November 2019.
 
AUB Daily Technical Chart (Source: Thomson Reuters)

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