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Steadfast Group Limited

Team Veye | 22 Oct 2020 ASX - SDF
Steadfast Group Limited
Call Buy
Asx SDF

Steadfast Group Limited (ASX: SDF) is an Australia-based general insurance broker network and underwriting agency group in Australasia, with operations in Asia and Europe. The Company’s brokers and Underwriting Agencies offer a range of general insurance products to their clients across Australasia. It operates through three business streams: Steadfast Network, Steadfast Underwriting Agencies and Complementary businesses. Steadfast Network is a general insurance broker network in Australasia, which includes approximately 398 general insurance brokerages. Steadfast Underwriting Agencies is an underwriting agency group in Australasia, which includes approximately 26 underwriting agencies. The Company’s Complementary business division, which includes seven complementary businesses, supports the operations of the Steadfast Network and Steadfast Underwriting Agencies (Profile source: Reuters)

 

From the Company Reports

Steadfast Group announces the financial year 2020 results with underlying EBITA up 15.5% and final dividend up 13.2%

Steadfast Group Limited (ASX: SDF) on 25 August 2020 reported that FY20 continued its year on year record growth since it's August 2013 IPO, despite the uncertainty of the commercial and economic impact to the business and the population at large that COVID-19 had imposed.

(Chart source: TradingView)

FY20 financial highlights

  • Underlying revenue of $826.3m, up 20.0%
  • Underlying EBITA of $223.5m, up 15.5%
  • Underlying NPAT of $108.7m, up 22.6%
  • Underlying EPS (NPAT) of 12.7 cents per share, up 13.4%
  • Final dividend (fully franked) of 6.0 cents per share, up 13.2%
  • Full year dividend (fully franked) of 9.6 cents per share, up 12.9%

 

Its underlying earnings growth was driven by successful organic and acquisition growth in the Group’s Insurance Broking and Underwriting Agencies.

Being a working capital and capital expenditure-light business, earnings were translated into cash flow throughout the year. There was no evidence of cash flow deterioration during the year despite COVID-19, with 100% of underlying NPATA converting into cash. This cash has been utilised to fund its continuing technology investment, further acquisitions, and pay increased dividends to shareholders.

 

(Graphic Source – Company Reports)

As anticipated and previously advised to shareholders, the Group’s FY20 statutory NPAT had been impacted by expensing the costs of the purchase of future income streams from the IBNA transaction and the Steadfast PSF Rebate Acquisition. This cost of $135.8 million and an impairment provision of $40.7 million against the carrying value of Intangible Assets and Goodwill of some of our equity brokers, resulted in its strong underlying profit being reduced to a Statutory Net loss of $55.2 million for FY20.

Steadfast Network brokers deliver 34.8% of GWP growth

The Steadfast Network brokers’ gross written premium (GWP) grew by 34.8% to $8.3 billion in FY20.

During the year the number of Network Brokers increased from 375 to 458, mainly as a result of the IBNA transaction, with 393 in Australia, 49 in New Zealand and 16 in Singapore. Strategically we also continue to hold a 40% interest in unisonSteadfast, a network of 236 brokerages across 130 countries.

Steadfast Insurance Broking delivers 10.2% growth in revenue

Steadfast Insurance Broking revenue increased by 10.2% with an organic growth contribution of 6.3% and acquisitions of 3.9%. Underlying EBITA growth of 23.9% was driven by acquisitions and organic growth with a continuation of premium rises by insurers throughout the year being partially offset by lower volumes during the June quarter trading period.

Steadfast Underwriting Agencies delivers 13.1% growth in GWP

Steadfast Underwriting Agencies continued to outperform with excellent organic growth and continued to benefit from higher premium pricing by strategic partners.

(Graphic Source – Company Reports)

Steadfast experienced significant growth across most agencies even in the COVID-19 trading period. The business generated over $1.3 billion of GWP, a 13.1% increase over FY19, mainly driven by organic growth of 12.1%. EBITA increased by 14.7% during the year.

Strong growth in underlying EBITA

The Group delivered strong underlying EBITA growth of 15.5% to $223.5m primarily driven by:

  • Organic growth contributing $9.7 million (+5.0%) (prior to technology investment) driven by the Group’s equity investments in brokers and a strong performance by the underwriting agencies; and
  • Acquisition growth contributed $27.4 million (+14.2%).

Balance sheet

Steadfast Group’s balance sheet remains well positioned, with a corporate gearing ratio of 21.5% well below the maximum limit of 30%. In January 2020 it increased its corporate debt facilities from $385 million to $460 million and extended the term of these facilities. As of 30 June, the Group had $181 million of unutilised capacity available to fund future corporate activity. There is significant headroom in the corporate debt covenants.

Since the balance sheet date, Steadfast had invested $70 million on equity broker acquisitions, and as of 25 August 2020, the Group now had $96 million of unutilised capacity available to fund future acquisition activity.

In July 2020, the IQumulate facilities were refinanced for a further two years. IQumulate’s premium funding borrowings and payables and corresponding receivables were now fully reflected on the Group balance sheet. IQumulate borrowings were secured by IQumulate assets and there was no recourse to Steadfast Group. Corporate debt financiers carve out IQumulate debt from corporate financial covenants.

 

(Chart source: Barchart)

FY21 guidance

Whilst there was uncertainty prevailing in the global economy, the trading conditions experienced in the last quarter provided confidence as to the resilience of its insurance broking business. The guidance range provided below was subject to the significant uncertainty surrounding the impact of COVID-19 on the global economy and the extent of any government stimulus measures.

Steadfast Group provided FY21 guidance of:

  • Underlying EBITA of between $235 million and $245 million
  • Underlying NPAT of between $115 million and $122 million
  • Underlying diluted eps (NPAT) growth of 5% to 10%

 

Market Risk Analysis

Steadfast has spent $70m on equity broker acquisitions post balance date and was intending to complete final PSF Rebate offer in FY21 to those network brokers who did not take up the offer in FY20.  It assumes that Strategic partners continue to drive anticipated moderate premium price increases. Ongoing trading conditions mirror the experience of the fourth quarter of FY20

 

Technical Analysis

The stock after leaving an incomplete inverse head & shoulder formation has made a cup and handle formation. The cup being V shaped, it could be a sharp reversal. It is trading above 50 MA on monthly t/f and also above daily and monthly supports. Daily momentum is up so it can have the potential of continuing to grow over short to medium term.

Steadfast Group Limited (ASX: SDF) 
Stock Overview
Sector Insurance
Risk Low to Medium
Market Cap $2.99 billion
Share Volume 868.48 million
EPS (FY) -$0.065
PE RATIO -
Yearly Dividend Yield  2.79%
Target Price (s) T1 $4.20 T2 $4.70
Stop Loss $3.08
Recommendation Buy
52 weeks High $4.100
52 weeks Low $2.240
Managing Director Mr Robert Bernard Kelly
Non Executive Director(s) Mr David Paul Liddy
Ms Gai Marie McGrath

 

Veye’s Take

Steadfast Group continued FY20 as year on year record growth since it's August 2013 IPO, despite the uncertainty of the commercial and economic impact on the business and the population at large that COVID-19 had imposed. The underlying earnings growth was driven by successful organic and acquisition growth in the Group’s Insurance Broking and Underwriting Agencies. The Company is a working capital and capital expenditure-light business, earnings were translated into cash flow throughout the year. There was no evidence of cash flow deterioration during the year despite COVID-19, with 100% of underlying NPATA converting into cash. This cash had been utilised to fund its continuing technology investment, further acquisitions and pay increased dividends to shareholders. SDF is a good value based on its PB Ratio (2.6x) compared to the AU Insurance industry average (3x). SDF is expected to become profitable in the next 3 years, SDF’s short term assets ($1.4B) exceed its short term liabilities ($1.1B). SDF’s short term assets ($1.4B) exceed its long term liabilities ($408.9M). Its debt is well covered by operating cash flow (30.8%). Veye recommends a “Buy” on “Steadfast Group Limited” at the current price of $3.41


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