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STEADFAST GROUP LIMITED : Income & Growth

Sep 01, 2015 | Team Kalkine
STEADFAST GROUP LIMITED : Income & Growth

Steadfast Group Ltd
 
  • With 747 offices across Australia, New Zealand and Singapore and gross written premiums of $4.1 billion, the company is the largest general insurance intermediary in Australia .Despite being a large player, the insurance broking industry is fragmented which means there are still lots of opportunities for consolidation. The company isn’t just a story of growth by acquisition and there are a number of ways in which management is focussing its business strategy to grow shareholder value, These include building on and developing strategic relationships with insurers and other parties, delivering on synergies from acquisitions made so far, growing through acquisitions and cross selling existing and new products and services across the group. The company appears to have a number of ways in which to grow its business even though insurances a nonat discretionary essential product and customers are not in a position to do without it even when times are tough. More importantly, insurance policies are often complex and is creates a strong relationship with customers which can lead to repeat business.
 
Results for FY 2015
 
  • During the year, the company delivered on a number of fronts. Despite soft premium rates, it achieved a growth of 38% in NPATA to $ 56.7 million and 23% in cash EPS to 9.79 cents per share which is also ahead of the original guidance and in line with the guidance of 22% to 23% provided in February. It  completed the acquisition of Calliden and QBE agencies to become the largest underwriting group in Australia and New Zealand and performance has been strong so far. The network offering was enhanced through the launch of a retail product offering called Steadfast Direct the Challenger brand and a strategic partnership with MetLife to distribute SME life insurance products. Cost savings were achieved by merging brokers and agencies and by offshoring. Steadfast New Zealand has been established to create a platform for operation similar to the business in Australia. Bank facilities were refinanced to provide a capacity of $ 110 million for future acquisitions and deferred settlement after funding $ 20 million for deferred settlements by 30 September 2015. The guidance for FY 2016 includes 10% to 14% growth in cash EPS, continuing earnings growth, and NPATA in the range of $ 80 million-$ 83 million which is up by 41% to 46% more than FY 2015. The final dividend fully franked is 3 cents per share making a full year dividend of 5 cents per share fully franked representing a growth of 11% year on year.
      
      Steadfast Daily Chart (Source - Thomson Reuters)
 
 
  • The premium placed by the group grew by 8.4% year-on-year to $ 4.4 billion. The growth was due to new brokers joining the network mainly because of acquisitions while organic growth was essentially flat because volume increases were matched by price reductions. The gross written premium amounted to $ 385 million up by 165% compared to the previous year and enhanced by the new acquisitions. The annual run rate is estimated at around $ 765 million making the group the largest agency group in Australia.


Strategic initiatives
 
  • During FY 2015, these were focused on enhancing the value of business through revenue opportunities and cost savings in the back office. On the revenue side, two important new products have been added to the network Steadfast Direct and an exclusive range of MetLife products tailored for the SME market. Since the pilot with a small group of brokers in May 2015 and the launch in July 2015, the company has been able to generate approximately $ 4 million in premiums and is excited by the prospect of selling retail home and car insurance products to customers. The company is also benefiting from cost saving measures through hubbing and shared common back-office services. Eight hubs have been created across six states by merging 26 brokers and the company is close to achieving its objective of realising 7% in cost savings for each over two years. Cost savings have also been achieved with a number of brokers taking advantage of the services of the subsidiary White Outsourcing. Further, savings and improved service levels are starting to show from offshore in in the Philippines and Vietnam. All this means that the stage is set for improvements in margins as the market starts to harden.
      
        Steadfast Dividend Numbers (Source - ASX)
 
  • Significant progress has been made in New Zealand by building a platform similar to the one in Australia. The Allied Insurance Group, acquired in 2014, has provided a local vehicle for services to brokers and has increased the market share of the general insurance intermediary market to 10% and strengthened the negotiating position. This places the company in an advantageous position in negotiating with strategic partners on behalf of the brokers to enhance their service offerings and to drive growth in the topline. A meaningful position is starting to emerge in Asia with affiliated brokers now based in China, Hong Kong, Malaysia, Singapore, the Philippines and Thailand and these brokers are helping networks in Australia and New Zealand to handle Asian business and extending the reach of underwriting agencies, reinsurance brokers and life brokers.
       
        Steadfast Group Brokers GWP (Source - Company Reports)
 
Strong balance sheet
 
  • The group spent more than $ 400 million on acquisitions during FY 2015 which were funded by the rights issue and placement of $ 300 million and the debt facilities. Net assets as at 30 June 2015 were $ 842 million compared to $ 525 million in the previous year and a strong balance sheet in conjunction with a gearing ratio of 25% allowed the group to lock into three and five year debt facilities of $ 285 million and to generate the capacity for future acquisitions and settlements of $ 110 million. The company is providing cash EPS growth guidance of between 10% and 14% for FY 2016 based on growth that is expected to be flat and no important acquisitions. The growth in NPATA will be driven by acquisitions completed in FY 2015 and organic growth. The split in first half/second half profits is expected to be the same ratio as FY 2015 namely 47%/53%.
 
  • The stock might look a little expensive on the basis of historical earnings but the price looks more reasonable when you consider earnings growth of around 25% for the next year and we would recommend a Buy at the current price of $1.53.
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