PSC Insurance—FH24—A bit soft but solid enough
As part of my top 10 holdings series, I report on the above.
The result was a little below my expectations although the reasons were a mix of operational and tax.
The thesis for this holding is that insurance broking and to a lesser extent the agency business is relatively stable and that a reasonable acquisition program carried out by skilled management can add value. PSI is smaller than many of the listed peers, potentially offering better growth and potentially a long-term option of an exit. There are many similar models around the world with track records of value being added. PSI concentrates on lower-quality targets, so some volatility can probably be expected but so far, that has not become an issue.
The result saw the company upgrade u/l ebitda for the full year 2-3%, but that was probably expected. The tax rate increased as the UK increased its corporate rate from 19% to 25%, which I probably should have picked up and there was a mix effect with the Australian operations doing better at a higher tax rate.
Growth was split, as usual, between acquisition and organic approx the same.
The negatives in an operational sense were the negative revenue results from Paragon (-7%, -3% cc).
Paragon is a specialised business with a 50% exposure to the wholesale business whereas most of the other operations are retail exposed. While retail rates remained hard, there was a moderation in commercial rates. Specifically, Cyber, D&O and M&A, interestingly management stated that results were in line with budget, pre-empting the rate softening. However, there was a mention of a war clause being invoked which I suspect brought an unexpected loss. Management also stated that the second half has seen some improvement, which is promising.
Cashflow was also a little weak but is lumpy.
The balance sheet remains relatively strong, the CFO said the next acquisitions will be undertaken with debt and FCF, the Nd ratio is 1.5x while the target range is 2-2.5X. Acquisition multiples continue to be in line with expectations at 9X. All acquisitions in the last 12 months were operating at or above expectations. The acquisition pipeline is strong.
The company seeded various growth initiatives and a couple from the new Ensurance acquisition. They should drive growth over time. No mention was made of the HK start-up?
The nature of this business is steady predictable growth, with surprises being few and small. That limits huge upside surprises and growth but allows capable management to consistently grow this business, adding value, with lower risk. Acquisitions are required but then are very capital-light and generate a lot of FCF.
Management reiterated the strength of the model and the growth prospects for the business.
At $4.67 I am assuming 11% eps growth for the next 5 years and an exit PE of 18X, giving 10% pa return.
As an aside, I note that the insurance industry is one of the few that benefit from a tightening cycle. Liquidity withdrawals usually help harden the rate cycle while underwriters get the benefit of higher rates on their float. Brokers are not as cyclical but get a second-order benefit from the cycle as well. Brokers also smooth out the cycle by inverting service fee charges with the premium cycle, adding to the stability.
Held= cost base (profit/loss adj) $3.28, last buys $4.31. sells $4.94