A favourable environment for commercial insurance premium rates underpins AUB Group ((AUB)), which has recently issued a modest upgrade to guidance. Ord Minnett notes around 60% of the company’s revenue is leveraged to premiums and retention rates are strong, although there is some pressure on new business.
Significantly, low interest rates create opportunities for acquisitions from debt and equity funding and to this end the broker highlights a somewhat fragmented broking market.
Ord Minnett particularly likes AUB’s strong earnings growth potential, via premium rates and cost savings, as well as through acquisitions. Within the insurance sector, Ord Minnett has a preference for brokers such as AUB and Steadfast ((SDF)).
BizCover
BizCover, in which the company has a minority stake, is a high-growth business, the broker points out, and has potential to contribute materially to earnings over time. Credit Suisse upgrades assumptions for BizCover following the continuation of improved trends from the fourth quarter and this business represents the bulk of the incremental contribution expected from acquisitions for FY21.
Guidance is achievable, in the broker’s view and there are opportunities for margin increases and cost savings. AUB has upgraded guidance to underlying net profit of $60-62m from $58.5-61m, which implies 12.3-6.1% growth year-on-year of which over half is organic.
The stock had rallied strongly ahead of the company’s AGM, more than 35% since August, and therefore guidance presents as slightly underwhelming, yet Credit Suisse considers relative valuation had been excessively to the downside.
Furthermore, Credit Suisse assesses improved guidance is about insured volumes – retention rates and new business gains – rather than the quantum of premium rate inflation that was originally guided back in August.
Some conservatism is suspected regarding the remainder of the year and the broker envisages the upgrade would have been larger but for lingering headwinds in underwriting.
The prospect of a vaccine is also likely to boost confidence further and meaningfully change the outlook is certain areas of the industry, particularly within underwriting, Credit Suisse suggests.
The broker eases back on assumptions regarding the agency/underwriting business where specific end-market exposures such as travel and hospitality are likely to endure a more protracted recovery.
Valuation
Ord Minnett initiates coverage with a Buy rating and $20 target, estimating the stock offers upside over a 12-month total return of more than 20%. This is supported by the growth trajectory and the broker’s forecast of underlying net profit growth of 14%.
The company intends to exit its unsuccessful venture into health & rehabilitation via the sale of the stake in Altius, while retaining Procare within the broking business. Ord Minnett calculates AUB can obtain $25m for its stake, allowing it to focus on core broking & agency.
The main risk is a potential ban on commissions or conflicted remuneration that results in a change to the business model, and weakness in the premium rate cycle. Gearing appears high at 34%, which signals to the broker limited ability to fund large transactions without an equity raising.
Macquarie, yet to update on the revised guidance, has recently found plenty of support exists from acquisitions and there remain further M&A opportunities as well as cost cutting potential.
There are three Buy ratings on FNArena’s database, with an $18.59 target that signals 6.9% upside to the last share price. Targets range from $17.53 (Macquarie) to $20.00 (Ord Minnett).
