The raising of new capital for PSC Insurance does two positive things for the company. It eases the balance sheet leverage and boosts the growth profile over the next 18 months.
PSI has launched an $80 million capital raising of new equity at $4.50 per share adding 17.8 million new shares, or about 5.1% of the new total shares on issue. The intended use of the money is for the group’s growth objectives across the Australian and UK Commercial broking landscape.
The balance sheet at the end of 1H22 was within the company’s target net leverage range of 2.0-2.5x, the new capital will provide PSI with the ability to sustain its non-organic growth. Since the start of FY19, PSI has invested $246 million in non-organic growth opportunities.
The extra $80 million could engineer an extra $8-10 million of EBITDA based on sector multiples of 8-10x. But PSI’s penchant for utilising a mix of scrip, cash and deferred payments could stretch this out to $10-12 million of extra EBITDA assuming it is deployed over the next 18 months.
Investment view
Management upgraded its FY22f EBITDA guidance to $87-92 million at the recent 1H22 result with the midpoint implying growth of 25% (2H22 growth of 19%). With the addition of extra capital, we would expect consensus earnings forecasts to gradually impute an incremental increase as the capital is deployed.
PSI has outperformed its local peers SDF and AUB in the last 6 months and is trading on a PE ratio of 27x FY22f eps that is more akin to its US peers.
The new capital will give PSI more muscle to extend its non-organic growth opportunities, but it will take time to implement. We recognise the double digit earnings growth profile remains attractive and this softens our concerns about a slowing medium term growth profile.
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 retained our Hold recommendation. On balance, the attractive growth profile is set against the premium at which PSI trades compared to SDF and AUB.
