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 focused on insurance broking, underwriting agency, and risk management businesses. As on December 12, 2019, the market capitalisation of AUB Group Limited stood at ~A$856.04 million. The company reported a decent set of numbers for the period ended June 30, 2019, wherein revenue (including other income) increased by ~12.6% to $279.8 million as compared to the prior year. It was mainly supported by an increase in commission, brokerage and fee income, and management fees from related entities. Net profit after tax attributable to equity holders for the period increased by 4.0% on YoY to $48.4 Mn. AUB Group Limited and broader insurance market have gained from pricing tailwinds in the past year and expect this to continue moving forward. The company’s strategic plan revolves around expansion of its existing portfolio in order to drive further organic growth and a continued disciplined approach towards the M&A activity, while, at the same time, continuing to improve the partners’ ability to win in the market.

FY19 performance was supported by a rise in ownership in Australian broking businesses (44% of Adroit Holdings, 17% of Northlake Holdings) and New Zealand broking businesses (50% of BrokerWeb Risk Services), and an acquisition within its underwriting agency business (50% of Cinesura Pty Ltd). Coming to the capital position, the company has been disciplined with respect to managing its capital, and its gearing ratio reduced to 22% in FY19, which is well below the mandated maximum of 30%. The company’s business has robust ongoing cash flow generation from its investments towards partner businesses, while, at the same time, the corporate entity has access to cash along with long-term corporate debt facilities in order to finance the future acquisition and organic growth initiatives. During the time frame between FY10- FY19, its dividend per share and adjusted EPS have witnessed a CAGR of 8% and 6%, respectively and, therefore, it can be said that the company managed to declare dividends and showed decent performance across different business cycles. The company has declared final fully franked dividend amounting to 32.5 cents per share, which was paid on October 8, 2019. This, along with an interim dividend amounting to 13.5 cents, resulted in the full-year dividend of 46 cents, reflecting payout ratio of 72.9%. Since FY10, this payout ratio happens to be the highest one, which reflects that the company has maintained its focus on shareholders' returns. At the current market price of A$11.800 per share, the stock is trading at P/E multiple ~17.82x of FY20E EPS.

 Considering healthy balance sheet position, decent capabilities to garner revenues, prudent approach toward capital management, significant scale & footprint and excellent market reputation, we have valued the stock using a relative valuation method, i.e., P/E multiple and arrived at a target price of high single-digit upside (in percentage terms).


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

Top 10 Shareholders: The following image provides a broader overview of the top 10 shareholders of AUB Group Limited:


Top 10 Shareholders (Source: Thomson Reuters)

Improvement in Key Ratios: The company’s gross margin stood at 95.5% in FY19, which is higher than FY18 of 94.7%. AUB’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. Its RoE stood at 13.7% in FY19 and the industry median stood at 10.3% and, thus, it can be said that AUB has delivered decent returns to its shareholders. The company’s Debt/Equity ratio stood at 0.25x in FY19, which fell from FY18 figure of 0.42x and, thus, it can be said that AUB is deleveraged its balance sheet. A lower debt on the balance sheet reflects that the company could make deployments towards its strategic growth objectives, and it can focus on achieving long-term growth. Its percentage of long-term debt to total capital stood at 14.5% in FY19 as compared to FY18 figure of 23.5% and, thus, it can be said that AUB has reduced its exposure in long-term debt.
 

Key Metrics (Source: Thomson Reuters)

Disciplined Approach Towards M&A Strategy Maintained: AUB Group Limited made an announcement about termination of the conditional agreement with Pemba Capital Partners to acquire Pemba Capital’s interest in Coverforce. It was added that the conditional sale agreement was conditional upon, among other things, the delivery of due diligence materials to AUB Group. The delivery of due diligence materials to AUB Group did not take place, and it has not waived its right with respect to due diligence.

AUB Group Limited would continue to apply the disciplined approach with regards to M&A strategy in order to acquire businesses, which accelerate scale and growth, leverage as well as expands its expertise in the key insurance risk areas and market segments.

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

Disciplined M&A Might Support Future Activities: AUB Group Limited has undertaken 54 acquisitions and bolt-ons in the span of previous 6 years, which have been valued at around $250 million in the M&A activity. The following image provides a broader idea of the M&A transaction activity:


M&A Transaction Activity (Source: Company Reports)

The group has the intention to continue to supplement organic growth with the help of relevant acquisitions and start-up opportunities. The company has applied a disciplined, proven and replicable approach with regards to the acquisitions in line with its M&A criteria. 

Dividend Payout Ratio Significantly Improved: On the backdrop of decent FY19 performance, robust balance sheet and capital position, AUB Group Limited has declared a fully franked final dividend of 32.5 cents per share, which was payable on October 8, 2019. This, along with an interim dividend that amounted to 13.5 cents, led to the full-year dividend amounting to 46.0 cents. The company’s FY19 dividend reflects a rise of 1.1% as compared to the previous year.


Dividend Per Share (Cents) (Source: Company Reports)

Since FY10, the company has managed to maintain its growth trajectory in its dividends, which could help the company in gaining traction among the dividend-seeking investors. In FY10, its dividend per share stood at 22.5 cents per share, which has been increased to FY19 dividend per share of 46 cents.

What to Expect from AUB Moving Forward: The company’s FY 2020 execution priorities primarily revolves around reducing corporate costs and drive efficiency via cross-network synergies, executing on strategically aligned acquisitions which drive outperformance and redefining risk services strategy. The company’s guidance for adjusted net profit after tax growth for FY 2020 of 4%- 6% includes an estimate of $1.5 million - $2.0 million (post-tax) of one-off major acquisition legal and financing costs. However, after adjusting for the costs, the company’s guidance will increase to 8%- 10% growth.

The company’s strategic plan involves the expansion of its existing portfolio in order to drive organic growth as well as a continued disciplined approach towards the M&A activity, while, at the same time, continuing to improve the partners’ ability to win in the market. The company would continue to grow its core broking businesses and expand its underwriting agencies in Australia.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: P/E- Based Approach

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


Historical PE Band (Source: Thomson Reuters)

Stock Recommendation: The company’s stock price has witnessed a rise of 3.39% in the span of the previous six months while, in the past three months, the stock has increased by 3.57%. The company has been effectively leveraging and managing its debt, which could further help it in stabilizing its balance sheet moving forward. The company’s total debt in FY18 stood at $160.8 million, which has fallen to FY19 figure of $134 million. Notably, its leverage ratio stood at 1.5x in FY19, which implies a fall from FY18 figure of 1.8x. However, the ratio was 1.9x in FY16. Between FY15- FY19, the company’s top-line has witnessed a CAGR of 9.21%, which reflects that AUB has decent capabilities to garner revenues that could help it in building its revenue base. During the same time frame, its net income has witnessed a CAGR growth of 8.52%. Considering healthy balance sheet position, decent capabilities to garner revenues, prudent approach toward capital management, significant scale & footprint and excellent market reputation, we have valued the stock using a relative valuation method, i.e., P/E multiple and arrived at a target price of high single-digit upside (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of A$11.800 per share (up 1.724% on 12 December 2019).

 
AUB Daily Technical Chart (Source: Thomson Reuters)

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