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Steadfast Video

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.