In today’s daily we have covered stock research on Austbrokers (Expensive). To view Top 20 Dividend Stocks click here

S&P 500 was down 0.73 points or 0.04% on Tuesday and closed at 1924.24. U.S. stocks inched lower in low volume on Tuesday, with the Dow and the S&P 500 receding from Monday's record closing levels. Krispy Kreme Doughnuts Inc. dropped 15 percent after cutting its earnings forecast because of mounting costs and slow first-quarter sales. Quiksilver Inc. slumped 41 percent after the surf wear retailer posted a wider loss than analysts had predicted. 

The European Central Bank on Thursday unveils its response to signs of low inflation and weak growth in Eurozone while Friday will provide further clues about the health of the U.S labor market via the May non-farm payrolls report. In Tokyo the Nikkei 225 rose 0.7% to a fresh two month high while Hong Kong stocks gained 0.9% as official Chinese service sector data helped reinforce optimism that growth was stabilizing after a disappointing start to the year.


S&P 500 Daily Chart (Source – Thomson Reuters)
 
S&P ASX 200 was down by 38.8 points or 0.70% on Tuesday and closed at 5479.7 points. BHP Billiton has been improving its U.S petroleum business by reducing costs. BHP has now become one of the fastest and most productive drillers for shale liquids in the Eagle Ford area in southern Texas. Westfield group plans to separate its Australia and NZ assets regardless of the second shareholder meeting. NAB has announced substantial shareholding in Nextdc Limited (NXT) and Orora Limited (ORA) representing 5.006% and 5.012% of voting power. CBA has announced substantial shareholding in the Stockland Group representing 5.18% of the voting power.


S&P ASX 200 Daily Chart (Source – Thomson Reuters)

The top gainers on ASX 200 were:- 


Stock of the Day – Austbrokers (AUB)
 
Austbrokers is one of the leading insurance broker networks in Australia, responsible for placing for over $1.5bn of insurance premiums annually. It has interest in over 45 insurance broking businesses. AUB is principally operated under an owner driver business model that allows individual brokers to retain equity in their businesses as co-owners. The member firms provide insurance broking services mostly to SME clients and high net worth individuals. AUB also owns Austagencies which currently operates through fifteen underwriting agencies that handle premiums in excess of $200m.


1H14 NPAT Growth (Source – Company Reports)

AUB has consistently grown earnings at above 10% over the seven years since listing in November 2005. This has been achieved through a combination of acquisitive growth, relatively defensive organic growth and operating leverage through sound cost management. We believe this growth can continue over the medium term, notwithstanding emerging rate pressure in commercial markets and more aggression from other broking groups in pricing broker acquisitions. AUB has a conservative and successful acquisition model and has in the past navigated through softer cycles without significant revenue pressure.


Austbrokers business overview (Source – Company Reports)

Following Steadfast’s listing and OAMPS signaling greater intent to acquire brokers again in late 2013, bidding tension has pushed up vendor price expectations. AUB has established a sound track record of paying realistic prices, so the current environment could stall the pace of acquisitions. However in the backdrop demographics are in AUB’s favor with a number of independent brokers still willing to be acquired by cluster groups as a transition to retirement strategy. Rates in the commercial property market have firmed up over the last 2 years after catastrophic flooding in 2011. However these markets are beginning to soften following the lead from increased capacity and appetite in reinsurance markets.


AUB daily chart (Source – Thomson Reuters)


The 1H14 adjusted Net profit after tax of $14.6m was up 6.2% on the previous corresponding period. Profit from broker operations increased 6.6% to $39.6m. The 2H earnings seasonality of the acquisitions undertaken at the end of FY13, in particular InterRisk, was greater than what we had forecast. The slowdown in WA mining activity also impacted results from one large broker which was estimated to have a 4% drag on 1H profit growth. We believe the stock is slightly expensive at its current price and would review the stock at a later date.
 

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