PSC Insurance released a trading update during the week. The update was very short and had a simple message; the group trading results are meeting expectations and EBITDA guidance provided at the half-year (seems for ever ago) will be met. To prove the point, they advised that underlying EBITDA to the end of April was 35% higher than the same time last year.
So, while the world around them has changed, to all intents and purposes, it seems that the only thing that has changed in the story of PSC over the last 3-4 months is the share price; down around 25%. Of note, board members and senior managers have been buyers, purchasing 588,993 shares over March, April and May with a total value of $1.43 million.
I would not call insurance broking an ‘exciting’ business, but I think PSC is probably more exciting in their vision than their Australian peers. They have progressively been building a global presence since listing on the ASX and can now boast the following:
In the local scene when people think insurance broking they think the bigger Steadfast Group (market cap ~$2.8 billion) and AUB Group (market cap ~$1 billion). Both organisations are far more heavily focussed on the local insurance markets than the smaller PSC Insurance (current market cap of ~$640 million). PSC is flying under the radar.
Directors have been heavy buyers over the last 3-months with purchases on market since September amounting to 0.4% of the stock float. In total, over the last 3-months directors have purchased 1,168,953 shares with a value of $3.27 million. Following the significant acquisitions over the last 18 months this is a good sign of confidence in their abilities and the direction of the group.
The directors and management team have always been heavily invested in PSC and at 30 June 2019 owned 53.3% of all shares. The recent purchases take their share of ownership up slightly to 53.8%.
PSC is undertaking what appears to be a well-planned and implemented acquisition strategy to diversify their earnings internationally. This strategy is dangerous and there are many examples of “roll-up” style strategies from companies that now look back on money wasted. However; given the level of internal ownership it is obvious that management is incentivised to make smart purchases.
The company has a good track record with net profit after tax growing by a compound rate of 25% over the last 3 years. Holders in FY19 received a dividend of just over 8 cents per share, which works out to a yield of ~2.7% at current share price of $2.98. Don’t let the seemingly small dividend put you off as it has grown at a compound annual growth rate of 31% for the last 3 years, so undoubtedly will grow into FY20.
TC's call: "Outperform" with no price target.
The major drivers of PSI’s 17% EBITDA growth during FY19 included:
Organically, Group EBITDA grew by ~7.5% (excl. investment income and currency benefits), entirely distribution driven – well below the previous 3year average of ~20%. More specifically we observed organic EBITDA change of +18%, -10% and +4% during FY19 respectively across Distribution, Agency and UK. In Distribution, strong client growth, modest premium rate rises and optimisation of the cost base across owned brokers, offset flat earnings from the network business. The latter a consequence of planned strategic spending to support future growth prospects.
A tightening of underwriting terms and remuneration paid to Agencies impacted profitability on the renewal book. Heavily 2H weighted, we are not anticipating material headwinds during FY20. Importantly, binders that remain in place are not constrained, and the Group is not expecting further altering of underwriter terms. This serves as a reminder that the earnings quality from Agencies pales in comparison to traditional broking businesses. Our FY20e imply that Agencies will generate ~10-12% of PSI’s EBITDA.
Rebalancing the UK business was the main driver of subdued performance. Namely restructuring Alsford Page & Gems as it abandons its’ African originated book, and to a lesser extent, redistribution of workflows from within to outside of the Group. Looking further ahead, we forecast improved earnings momentum from this region as Chase International builds scale and starts to win more material contracts, while Paragon (an expected settlement of 2Q19) continues to take market share and perform ahead of acquisition metrics.
Earnings Revisions. We have adjusted our FY20e EBITDA from $60m to $58.1m to reflect a later than anticipated settlement on Paragon. Combined with now forecast higher interest costs we have downgraded our FY20/FY21e NPATA by 5.2% and 2.6% respectively.
Valuation & Recommendation
Net of listed investments, PSI trades at 19.8x our FY20e EPSA (on a fully diluted basis) - growing at 24.5% EPSA (0.80x PEG). Our FY21e EPSA growth of 14.1% only accounts for announced acquisitions. It is possible that additional acquisitions could lead to upward revisions to our FY21e EPSA growth assumptions of closer to 17-20%. See page 3 for our assumptions in EBITDA growth. Combined with 3.6% div. yield, highly aligned management team who have proven to be prudent allocators of capital, we continue to believe shareholders will be rewarded in the medium term. Future acquisitions should improve stock liquidity. As this occurs, PSI’s valuation discount on an EPSA basis of approx. 10-12% to global peers could close. We maintain our Outperform recommendation.
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