Shares in Steadfast Group (ASX:SDF) have been range bound since an ABC exposé on the strata industry in September last year. While that chapter is now in the past, the shares have never fully recovered and have underperformed its peer AUB Group in that time.
We recently researched SDF in The Dynamic Investor to assess its attractiveness as an investment.
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 645 network brokers and agencies globally, 409 are in Australia & NZ.
Steadfast also owns a portfolio of 30 underwriting agencies providing specialist insurance products in niche market segments.
Key Fundamental Drivers
Rate of Growth in Premiums Declining
For the six months to 31 December 2024 (1H25), premium rate increases moderated to mid-single-digits and resulted in organic growth of only ~5% for the domestic broking business. Guidance provided by the Company assumes that premium rate increases of ~5% will persist, which is well below the previous guidance for 7-9% growth.
Unlike its major competitor AUB Group (ASX: AUB) and other SME insurance brokers, SDF sees limited opportunity to grow fees ahead of underlying premiums. This explains the softer-than-expected 1H25 broking fee revenues. Although the Company reduced guidance for premium rate increases, SDF continues to guide for 12-16% underlying EPS growth. This is because Net Profit After Tax and EPS is being supported by improved premium funding earnings, higher interest revenues from cash holdings and cost control.
Recent industry figures suggest that a portfolio with SDF’s product mix would have achieved +6.2% pricing growth in the March 2025 quarter. The rate of pricing growth is likely to have moderated in April – Steadfast brokers experienced a slowdown across all products in the month of April (with the exception of Personal Motor).
Cost Pressure in Agencies Segment
Strata and Agency revenues are expected to remain robust. However, enhanced governance and disclosure regimes could be adding to organic cost growth. The latter rose by 10.5% in 1H25.
Whilst this represents a slowdown from 19.4% in 1H24 and 14.3% in 2H24, 1H25 was nevertheless the 5th consecutive half that Agency organic cost growth outpaced organic revenue growth. Similarly, organic cost growth for the Broking segment slowed in 1H25 (6.3% vs 11.8% in 1H24). So, the Company has more work to do on costs (in order to protect margin) as the extent of premium rate rises slow.
Signs of Growth From Expansion Into US
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 comprises 220 insurance agents in a fragmented market of 40,000, suggesting ~0.55% market share.
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. A key opportunity for SDF is therefore to acquire equity within the network. Assuming a similar 14% commission rate commensurate with SDF’s existing equity brokers, this would imply a revenue pool of ~US$1b across ISU brokers.
The US network is seeing growth, albeit off a small base, ISU Steadfast saw 27 gross new agents joining in 1H25. Network members are now at 235 (compared with 220 at the time of the acquisition). The number of brokers is expected to grow further as SDF upgrades the ISU tech platform.
Balance Sheet Capacity to Pursue Merger & Acquisition Opportunities
While gearing as at 31 December 2024 stepped higher, the gearing level is significantly below the maximum group gearing ratio of 35%. The Company increased its gearing ceiling from 30% to 35% in order to provide capital management flexibility. The move was likely in response to: i) A growing offshore Merger & Acquisition (M&A) pipeline (FY25 target: $300m) and ii) A willingness from offshore investors to accept a higher gearing ratio from the group in a relatively stable sector.
There is potential for the $300m acquisition pipeline guidance to be increased given potential consolidation constraints that may eventuate from merger reform in 2026.
Fundamental View
SDF’s current 1-year forward P/E multiple of ~18x is below the 5-year average of ~21x. However, we consider that the current multiple is unappealing in the context of an EPS growth profile of ~6.5% over FY25-27 on a CAGR basis. Further, we see limited scope for EPS upgrades as a result of two factors:
i. The contribution to overall earnings growth from the international expansion strategy is a medium-term story,
ii. The potential for higher-than-expected cost growth to limit operating leverage – especially in the context of a decline in the rate of premium rate increases going forward.
Charting View
Apart from a brief moment in mid-2024, SDF has spent the past 2 years in a trading range between about $5.30 and $6. It is now towards the top of that range. A strong push above $6 would indicate a new uptrend and that would be a buy signal. Otherwise, a move back to the lower end of the range near $5.30 would be a better entry point. A break under $5.30 would be a negative as that could lead into a new downtrend.
Michael Gable is managing director of Fairmont Equities.
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