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30 March 2015
An interesting feature of the National Insurance Brokers Association (NIBA) Convention in Melbourne this week is the presence of three broking groups in the exhibition hall, each there for the sole purpose of recruiting new brokerages to their flocks.
This event is a rare opportunity for the cluster groups to recruit new members, because the NIBA Convention is the only national event not directly controlled by a broking group.
Steadfast is there, of course, and so is cluster minnow Insight, which is trying to attract the small privately owned brokerages struggling to make their way through what is rapidly becoming a less friendly world.
But the Austbrokers flag isn’t flying at NIBA. Instead, the group has chosen to put the spotlight on its joint venture vehicle A&I Member Services (AIMS), which brings together the IBNA group and Austbrokers.
Prior to listing on August 2, Steadfast’s spruikers were keen to move the focus away from the plunging post-float fortunes of iSelect by comparing their company with Austbrokers. It was a fair enough ploy even if it did irritate Austbrokers CEO Mark Searles and his team.
The game has changed a bit since the Steadfast float. Both companies are now competing for new acquisitions. There are 873 licensed broking firms of all sizes operating in Australia – global, affiliated and independent – controlling 77% of commercial insurance distribution.
So while many of the remaining independents are likely to be very small and of more interest to Insight, there’s still a solid pool of about 300 valuable acquisition prospects out in the market, many of them medium-sized independents with national and even international footprints.
So as a service to those independent broker CEOs who one day soon may find themselves with two letters of offer on the table and no real idea which way to go, here’s some indication of just how difficult it is to make a simple comparison of Steadfast and Austbrokers.
Which company is the biggest?
Steadfast has 280 members, gross written premium (GWP) of $4 billion and a 22% market share.
Austbrokers has 46 firms that it owns about 50% or more of, GWP of $1.7 billion and a 10% market share.
But perhaps a fairer comparison would be to look only at the 62 Steadfast members which sold from 25% to 100% of their companies to the group – the so-called Steadfast equity brokers. After all, the 218 that didn’t sell any equity to Steadfast are still independently owned – and are therefore potential acquisition targets.
The 62 brokerages Steadfast has a stake in earned $1.1 billion in GWP last financial year, for a market share of 6%.
On that measure Austbrokers is $600 million ahead in GWP. It also illustrates the fact that Austbrokers members earn far more revenue on average than their Steadfast counterparts.
But wait, what about…
Austbrokers’ joint venture partner IBNA has some 76 members and GWP of $1.1 billion – the same as the Steadfast equity brokers. Its members are all independent operators.
The AIMS joint venture therefore has 122 firms either part-owned (Austbrokers) or independent (IBNA), GWP of $2.8 billion and 17% market share.
Therefore, AIMS is still $1.2 billion shy of Steadfast’s $4 billion GWP and 22% share.
The above comparisons don’t take into account contributions from other non-broker businesses. Steadfast owns stakes in four underwriting agencies, a 50% stake in Macquarie Premium Funding, most of White Outsourcing and 25% of Meridian Lawyers.
Austbrokers owns 15 underwriting agencies, and its Austagencies arm added $220 million to the group’s bottom line in 2012/13.
Which company has the better share price?
When it comes to the sharemarket – and for a listed company share value is everything – Austbrokers is the heavyweight.
Its share price on the day Steadfast floated at $1.15 was $11.12. It has spent most of the year above $11. Its climb to these lofty heights has been steady since it listed for $2 in November 2005. It has delivered very impressive year-on-year profit increases.
On October 4 business website FT.com reported the consensus forecast among seven polled investment analysts covering Austbrokers Holdings was that the company would outperform the market. The previous forecast had advised investors to buy into Austbrokers.
Steadfast shares aren’t likely to reach such lofty heights for a long time. It floated at $1.15 and its price has risen to about $1.60 – a very positive trend in the short time it has been listed. But the company has to build a reputation for consistent profit growth and increase its efficiencies. No one believes that can be achieved in a short space of time.
Analysts at Baillieu Holst, Credit Suisse and Macquarie have recently examined Steadfast in considerable depth, and their findings are mixed.
While Baillieu Holst and Credit Suisse forecast a soft market and worry about short-term issues, Macquarie has given Steadfast an “outperform” rating and set a $1.60 price target on the stock.
It says medium-term growth is likely at Steadfast as it pursues acquisitions within its own pool of independent members.
Baillieu Holst’s September 24 report says Steadfast’s growth has come from increasing GWP by more than 10%, compared with a rise in broker income of less than 5%.
It questions the decision by Steadfast to not have representation on the boards of the equity group members, relying instead on share and unitholder deeds. It also raises concerns about integration and culture issues, and questions Steadfast’s priorities in building back-office synergies through “hubbing”.
Credit Suisse’s August 30 report predicted Steadfast would underperform in the present financial year, and nominated a target share price of $1.36.
It says Steadfast is currently trading at a minus-10% premium to Austbrokers, “and while we are supportive of the [Steadfast] management strategy and see upside to the earnings guidance in FY14, the current share price implies significant earnings growth with little allowance for execution risk”.
If you’re an independent broker, it’s a sellers’ market out there, with two quite different companies with different business cases and strategies fishing in the same pool for a limited number of high-performance brokerages.
Austbrokers is well established, has a solid reputation and is a sharemarket hero. It also has IBNA to provide additional energy. Steadfast is bigger (depending on the measure) in revenue terms, but still has quite a long way to go and some re-engineering to undertake to reach its potential.
Austbrokers will continue to fish for likely prospects in the wider industry as well as among Steadfast’s independent members and IBNA, and Steadfast will do exactly the same.
We should expect some surprises as the two large local listed companies dip into their impressively weighty war chests over the next year, although each will be careful to ensure they pay a realistic price.
However, the emergence of Steadfast as an active buyer means the competitive instinct will also be in play, which is an encouraging development for independent brokers wondering if now might be the best time to sell.
Other factors that have to be taken into consideration are the increasing willingness of medium-sized independents to acquire strategic companies. And we shouldn’t forget the ability of the major global brokers to swoop on key acquisitions, either.
We do indeed work in interesting times.
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