Insurance premiums are on the rise and Steadfast is well placed to capture plenty of growth from this extended cycle.
SDF reported 1H22 EBITA of $153.9 million, an increase of 22.7% on last year and net profit of $76.3 million. Both were in line with market expectations. Organic growth of 10% was driven by a strong performance in Agencies as premiums keep rising, volumes are climbing (+16%) and tight cost control expanded margins by 170bp.
Conversely, growth in Broking was primarily driven by the Coverforce acquisition and continued benefits from Project Trapped Capital. The latter is providing SDF with a strong pipeline of non-organic growth.
There are13 potential acquisitions in the closing stages of negotiations plus a longer term pipeline of 30 deals. In aggregate, these deals could add more than $45 million to EBITA highlighting the opportunity in the domestic network. SDF has a strong track record in completing deals that are incrementally additive.
SDF has $300 million of available debt facilities to fund non-organic growth in this manner.
The Steadfast network increased Gross Written Premium by 15.6% to $5.2 billion in the half year as brokers benefitted from the better market and volumes.
Flagged earlier in the year, premium rate increases are gathering momentum heading into the important renewal season.
Alongside this organic growth, SDF has been judiciously adding acquisitions and the combination has led to an upgrade in FY22f guidance. FY22f EBITA is now $330-340 million, a ~3% upgrade and net profit is expected to be $163-170 million.
Investment view
The current cycle of firming insurance premiums has played out longer than anticipated despite the prospect of rising interest rates. It is possible that mid-single digit premium increases are sustainable in the near future.
SDF will supplement this strong organic growth profile with acquisitions that suggest the trading PE ratio of 21x FY23f EPS is not stretched.
Risks to investment view
Slower than expected organic growth across the broking network and underwriting divisions would impact earnings growth. There is some risk associated with the many acquisitions the company intends to make.
Recommendation
We have retained our Buy recommendation.
