Strong FY22 Result: AUB delivered a FY22 NPATA of A$74m which was at the top-end of the guidance range and ~4% ahead of street expectations. This strong performance which saw FY22 earnings growth of 22% was primarily driven by strong organic growth across its core Broking (+13%) and Agencies (+74%) divisions. These divisions benefited from both a supportive rate environment and management initiatives that drove margin improvements.
However, the uplift of these divisions was offset by an increase in corporate costs and a weaker than expected result from both BizCover (+18%) and AUB’s NZ portfolio (-12%). A fully franked dividend of 38c was declared, taking the full year dividend to 55c, representing a 52% pay-out ratio.
FY23 outlook and upgrade to consensus: Underlying NPATA for FY23 is guided to A$86-91m, representing growth of 16%-23% over FY22 (excluding any benefit/costs associated with Tysers acquisition). Growth is expected to be driven by organic growth of 8-11%, non-organic growth of 2-3% and a 6-8% benefit from the lower interest costs (post the Tysers capital rising).
Post result the market has upgraded earnings for FY23E by 2-3%.
Potential earnings growth: Since the CEO Mike Emmet took control of AUB Group (2019), its group margins have seen a >800bps improvement. If margins across Agencies (37%) and NZ (26%) rise to their medium-term targets of 45% and 38% respectfully and Broking margins (33.7%) continue to increase to their medium-term target of 35%, we see significant earnings upside of >10% on the current revenue base.
In addition, the 30% accretion expected to be delivered by the Tysers acquisition signals to us that AUB shareholders are set to benefit from continued robust earnings growth over at least the next 3 years.
Investment view
Despite AUB share price increasing by >25% since its mid-June lows, it is still trading at a 25% PER discount to its peer Steadfast Group (SDF). We believe the share price does not adequately capture the group’s 1) impressive organic growth profile; 2) the upside if AUB achieve its medium-term margin targets; and 3) the earnings and strategic benefits associated with the Tysers deal.
Risks To Investment View
Risks to our investment thesis on AUB include: slower than expected organic growth across broking and agencies divisions; a deterioration across Australian insurance markets, which leads to declines in insurance premiums; lower than expected investments in non-organic growth opportunities; execution and integration risks of acquired businesses, unfavourable findings in relation to the on-going review into volume based incentives and commission payments, and greater than indemnified regulatory risks / financial penalties in relation to Tysers acquisition.
Recommendation
We have retained our Buy recommendation.
FIGURE 1: FY22 TO FY23 UNDERLYING NPAT BREAKDOWN $M
