We recently took a positive view on AUB Group (ASX:AUB) after the Company upgraded full-year profit guidance for the second time in six months. The key drivers underpinning this include:
i) Premium rates for Australian Broking are expected to increase in the range of 5% to 6% (following premium rate increases of 7.4% over 1H21,
ii) Continued small bolt-on acquisitions, and
iii) Shareholding changes in existing network members.
Aside from our view that the FY21 guidance appears conservative, there are a number of key fundamental drivers underpinning medium-to-long term earnings growth.
Since our recent report, the shares have reached all-time highs. With this in mind, we consider whether AUB still offers value at current levels.
About AUB Group
AUB Group (AUB) is the largest equity-based risk management, advice and solutions provider in Australasia. The Company operates an ‘owner-driver’ partner model (i.e. where it hold equity stakes in partner businesses). It also has ~11% share of the intermediated general insurance market; and ~22% share of the general insurance SME segment in Australia. AUB’s business model is highly cashflow generative and carries no insurance risk, unlike the general insurers.
The Company presently operates four segments, with Insurance Broking (Australia) accounting for ~80% of group profit. The other operating divisions include Insurance Broking (NZ) after the Company entered the NZ market in early 2015, Underwriting Agencies and the Health & Rehab segment.
Fundamental View
AUB shares are currently trading on a 1-year forward P/E multiple of ~22.5x. While the shares have re-rated since our recent review, this multiple does not appear demanding in the context of Underlying EBIT growth of ~10% over FY20-23 on a CAGR basis.
While the rate of Underlying EBIT growth is strongly weighting towards earnings growth in FY21, it is worth noting that there is significant upside to current FY22 and FY23 consensus earnings growth estimates (currently ~4% in each year) given the potential for:
i) Further premium rate rises are still on the agenda, as the insurance cycle remains in an expansionary phase that is likely to extend beyond FY21. This benefits the Australian Broking segment, which is the key driver of profitability, given that there are also opportunities for further margin expansion.
ii) Better-than-expected operating leverage in Australian Broking, especially from the recently-acquired BizCover and Experien businesses. Notably, the investment in Experien has significantly enhanced AUB’s market position in the Medical and Dental industries and strengthened its capability in Life Advisory.
iii) Earnings growth expansion in the Underwriting Agencies segment from FY22, as the full benefits a recent restructure are realised.
iv) Proceeds from the sale of the Health & Rehab business are expected to lower the gearing ratio from 2.3x as at 31 December 2020, to ~2x (below the maximum target of 3.0x). While this level of gearing remains in line with the average gearing level over the last 4-5 years, it is worth noting that AUB’s business model is highly cashflow generative and has proven to be resilient through COVID-19 and carries no insurance risk (unlike the general insurers). As such, there is adequate scope for accretive Merger & Acquisition opportunities, which are likely to be well received by the market, given the benefits generated to date from recent acquisitions.
Charting View
In the last quarter of 2020, there had clearly been resistance just under $18. In late February, we saw AUB stage a breakout, before going back and retesting the break. This retest appears to be successful and there is a high chance that AUB continues to trend higher from here.
Michael Gable is managing director of Fairmont Equities.
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