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In today’s daily we have covered stock research on Steadfast (BUY).
The S&P 500 was down by 10.03 points or 0.49% to 2045.44 on Monday. U.S. stocks fell on Monday due to increased tensions over Greek debt negotiations and disappointing Chinese economic data on top of investor uncertainty about interest rates. Rising oil prices helped offset the pressure by boosting the energy sector, while utilities shares declined as investors opted instead for fixed income investments.
The Shanghai Composite index rose 0.6 per cent, in spite of disappointing trade data released on Sunday — but was still about 9 per cent down from its mid-January peak. Chinese exports fell 3.3 per cent in January while imports tumbled 19.9 per cent. Oil prices climbed for a third straight session, lifting the S&P energy sector 0.5 percent after OPEC forecast greater demand for crude this year than previously thought.
Brent Oil Daily Chart (Source – Thomson Reuters)
S&P ASX 200 was down by 5.3 points or 0.09% on Monday and closed at 5814.9 points. Telecommunications was the worst-performing sector, down 1.2 per cent. Telstra Corp dropped 1.2 per cent to $6.51 ahead of showing its latest half-year results on Thursday. Australia's biggest retailers also dipped. Woolworths lost 0.7 per cent to $32.33, whileWesfarmers, owner of Coles, lost 0.7 per cent to $44.45.
Healthcare was the best-performing sector, up 1.9 per cent, as vaccine maker CSL, which will show full year earnings on Wednesday, rose 1.9 per cent to $90.16 - its highest value since October 2007.Glove and condom maker Ansell jumped 5.4 per cent to an all-time high of$24.30 after reporting a 33.7 per cent rise in interim net profit as two major acquisitions made in 2014 performed well. MMA Offshore, formerly Mermaid Marine Australia, was the best-performing stock in the ASX 200, climbing 7.8 per cent to 96.5.
Ansell Daily Chart (Source – Thomson Reuters)
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Steadfast (BUY)
Steadfast Group Limited (SDF), the independent insurance broker, got our attention with its latest announcement that the Company is very well ‘on target to meet expectations’ for FY15. The 1H15 preliminary results however appear to be slightly below the market expectations owing to seasonality related issues. The Company mentioned that there has been a 49% increase in fees and commissions with regards to the 1H15 result. Further, 15% rise of EBITA after corporate expenses, 9% increase in NPAT attributable to members, and 9% increase in cash NPAT have been reported. The market capitalization of the Company is $792.59 million.
FY14 Earnings Resilience (Source – Company Reports)
The Company, sometime back, acquired the agency operations of Calliden which has been the largest acquisition to date for SDF. The Company aims to extract value from this step and it may be considered as a c10% accretive acquisition which is expected to raise SDF’s total Gross Written Premium (GWP) from agency activities. Normalised EBITA pre-synergies were estimated at $8.3m. The circa $57m acquisition, after the on sell of the general insurance operations to Munich Re, has been funded from the expanded debt facilities. This indicates that SDF may have a ~$25m headroom remaining from the facilities. The guidance for FY15 cash EPS growth has been provided to be of 10-13% before any effects from the above acquisition. The Company intends to pay out 65-85% of NPAT and a minimum of 50% of NPATA as the Dividend.
We do note the softness in premiums through 1H15 with trends to continue given the AGM. There may be a pressure on growth in view of recent updates by AUB suggesting a 10% reduction in their premium rates. Nonetheless, higher insured amounts and volumes, and increase in commission rates and fees may help overcome the pressure as indicated by SDF. The Company conferred that policy growth is being equipoised by lower rates. In such scenario, we see that the Company believes to benefit from organic initiatives to continue with modest growth.
Drivers of Network GWP Growth (Source – Company Reports)
The accretive acquisitions are expected to serve well to perform in the fragmented industry. SDF may also be eying for targets such as QBE with respective underwriting agencies up for sale. In fact, the acquisitions and other attributes such as hubbing activities, Steadfast Direct, financial performance benchmarking, and Project 360° (process centralisation project) through CY14 may provide an additional ~$9m to the EBITA in FY15. Updates with regards to the Steadfast virtual underwriter (SVU) uptake by underwriters are awaited. It is understood that the SVU quotation system has been developed and linked to some insurers.
Steadfast Underwriting Agencies (Source – Company Reports)
The factors to keep an eye on include downturn in the insurance cycle, competition, changes in distribution models with regards to insurers’ direct engagement and/ or customers transacting via internet.
Hubbing (Source – Company Reports)
Although the final half year results and a detailed explanation thereof is expected from SDF in late February 2015, we see a potential in the play given robust earnings growth projection for the next 2-5 years based on the acquisitions and other efficiency initiatives undertaken by the Company. The earnings stream looks defensive with solid free cash flow generation.
SDF Chart (Source - Thomson Reuters)
Based on the above, we put a BUY recommendation for this stock at the current price of $1.51.
Team Kalkine
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Sydney NSW 2000 Australia
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Phone - 02 8667 3147
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