Steadfast Group (ASX:SDF) shares have been trading lower over the last couple of months on the back of several investor concerns. Notably, the premium rate environment is moderating. This is placing greater reliance on accelerated acquisitions, as well as cost savings, to achieve Company guidance for this financial year (FY26).
Accordingly, we recently researched SDF in The Dynamic Investor to assess whether the recent weakness presented an entry opportunity. Or, is it better to remain on the sidelines?
About Steadfast Group
Steadfast Group operates insurance broker and agency networks in Australia, NZ, Singapore and the US. The Company has the largest general insurer broker network in Australia, with a market share of ~36%, Of the 682 network brokers and agencies globally, 402 are in Australia & NZ. In the latter region, there is a stable network of brokers that has grown as new brokers have joined the group, while only a very small number of brokers have left.
The Company provides a broad range of services and solutions to support the broker and agency businesses in its networks. These include market access, technology, risk solutions and operational support. Steadfast owns a portfolio of 30 underwriting agencies providing specialist insurance products in niche market segments to the open market.
Key Fundamental Drivers
Slowdown in Premium Rate Growth
As context, revenue for insurance brokers is leveraged to the level of insurance premiums, as ~70% of their revenue is commissions-based and paid as a percentage of Gross Written Premium (GWP). On average, retail brokers and underwriting agencies in Australia earn 15-20% of GWP as commissions. Typically, slower/falling insurance rate increases means less commissions earned for brokers than otherwise.
Following ~7 years of favourable industry conditions where insurance premiums benefited from high-single digits annual price increases, premium rates are now moderating or falling. More recently, the pace of commission rate cuts has been accelerating.
In a recent trading update, SDF reported Australian average premium rate increases are tracking at +2.4%. This represents a slowdown relative to recent periods, but remains above SDF’s guidance of +1-2% for FY26. While many lines of business are seeing mid- to high-single-digit increases, SDF’s mix seems to be less favourable in comparison to the broader market.
Expansion into US Gaining Momentum
In October 2023, Steadfast acquired 100% of an agency network, ISU Group in the US. This business was re-branded ISU Steadfast in August 2024. The ISU network comprised 241 insurance agents in a fragmented market of 40,000, suggesting ~0.6% market share. As a network, ISU offers its members preferred insurer access as well as peer-to-peer coaching around broking best practice.
Over the medium term, SDF believes it can enhance ISU’s member offerings by providing access to SDF underwriting agencies and the greater adoption of SDF’s technologies (SCTP, INSIGHT). In addition, SDF can offer additional resources such as premium funding, placement solutions and business solutions.
The US network is seeing growth, albeit off a small base. Network members are now at 241 (compared with 220 at the time of the acquisition) and this number is expected to grow further as SDF upgrades the ISU tech platform. Further, ISU has continued to grow its earnings base and exceeded budgeted FY25 profit.
Aside from growing the ISU network, there are two main growth avenues in the US. The first is to growing the portion of ISU’s GWP volume that is generated via master agreements (currently only ~30%). The second growth avenue is via acquisitions, where SDF is seeking to create two regional hubs for growth in the US by buying ISU network brokers.
Balance Sheet Supports Merger & Acquisition Opportunities
As At 30 June 2025, the gearing ratio was 27% (excluding premium funding debt). To provide capital management flexibility, the Board-approved maximum gearing ratio was increased during FY25 to 35% (previously 30%).
SDF has since raised its maximum gearing ratio from 35% to 40%, which is now in line with existing covenants. The higher gearing target is expected to support external M&A activity as well as the Trapped Capital Project (Where the Company seeks to increase its equity positions in the Network Brokers, by providing the opportunity to unlock trapped capital by partial sale to the Company).
The strategy to increase gearing levels in order to help drive acquisitions despite the softening revenue environment is stretching the balance sheet position. We estimate that the recent acquisitions have increased the gearing level to ~31%, which is still well below SDF’s newly increased limit of 40%. Thus, there is a risk that a prolonged softening of the premium rate environment may result in the Company having to undertake additional debt-funded acquisitions in order to support EPS growth at a level that is in line with Company guidance.
Fundamental View
SDF shares are currently trading on a 1-year forward P/E multiple of ~15.5x, which is slightly below the bottom end of the trading range over the last three years (~16-24x), Notwithstanding the apparent value appeal, we contend that the shares are unappealing in the context of an EPS growth profile of +6% over FY25-28 on a CAGR basis. There are also several factors continuing to act as an overhang on the shares:
i. A slowdown in premium rate rises, which has been a key factor supporting a higher trading multiple towards the top end of the trading range,
ii. The prospect of a further increase in gearing levels in order to fund acquisitions in order to replenish the lower contribution to organic EPS growth, and
iii. The contribution to overall earnings growth from the international expansion strategy remains a medium-term story.
Charting View
In October, SDF rallied to a new high but was quickly sold down. This failed breakout was a negative sign. Now it has fallen under a support level where price action above the blue line shown resembles that of a head and shoulders top. Either way, price action looks negative at the moment for SDF and we expect it to fall towards $4.50.
Michael Gable is managing director of Fairmont Equities.
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