PSC Insurance has delivered a very good performance in the last six months, as we hoped. The UK business was the standout division. PSI reported 1H22 EBITDA of $40.7 million, an increase of 42% driven by both organic growth and recent acquisitions. The investment in the UK, Paragon in particular, is paying off handsomely for PSI and the UK businesses contributed more than 70% of the increase in EBITDA this period.
Paragon is benefitting from significant rate increases across Cyber and D&O lines of insurance, as well as a good policy count increase. More than 120% of net profit was converted to cash and SDF declared an interim dividend of 4.5cps.
The company has approximately $90 million of capacity for the pursuit of medium term acquisition objectives.
Management has upgraded FY22f EBITDA guidance to $87-92 million from $84-89 million. Net profit guidance got similar treatment with a new range of $57-61 million. The mid-single digit increases now imply FY22f EBITDA growth of about 25% (2H22 growth 19%).
Investment view
PSI has outperformed its insurance peers (SDF and AUB) in the local market by 30-45% in the last 6 months. PSI is now trading on a FY22f PE ratio of 26x which is above its competitors but in line with US peers.
PSI is the most diverse and global of Australia’s three listed Australian insurance brokers providing exposure to the UK and US markets through its UK wholesale and retail broking divisions. But current gearing levels are pushing the upper limits of the company’s leverage targets. Also, rate increases across D&O and Cyber will being to moderate through CY22.
That all signals a slowing growth profile heading into FY23f and justifies our Hold recommendation, in our view.
Risks to investment view
Slower growth in the core broking and underwriting divisions would impact earnings. A change in insurance markets could lead to lower premiums.
Recommendation
We have reduced our recommendation from Buy to Hold.
