Shares in AUB Group (ASX:AUB) have retraced from recent highs. This is due to market concerns about the potential impact from a softening premium rates and mixed performance across its operating segments.
Accordingly, we researched the Company in The Dynamic Investor earlier this month to assess whether the recent weakness presents an entry opportunity.
About AUB Group
AUB Group is the largest equity-based risk management, advice and solutions provider in Australasia. The Company operates an ‘owner-driver’ partner model. Under this model, AUB holds equity stakes in partner businesses). The Company 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 five segments, with Insurance Broking (Australia) the main contributor to group profit. The other operating segments include BizCover, Insurance Broking (NZ), Underwriting Agencies and Tysers International.
Key Fundamental Drivers
How Will AUB Navigate a Softening Premium Cycle?
AUB provided underlying NPAT guidance range of $215 – 227m for financial year 2026 (FY26), representing +10% growth on FY25. Growth is expected to be mostly driven by organic growth. AUB sees room to move on fees and stated that it can manage a slowing premium cycle (+4-5% growth in FY25 from average +6% over the last three years) through strategic levers.
In particular, fees are now rising after no increases for four years. In addition, brokers are helping clients address under-insurance after holding back sum insureds during a hard market. AUB doesn’t consider premium rates a material factor in achieving FY26 guidance.
In Australian Broking, fees are 40-50% below industry with commission ~10% below entitlement. This should support multi-year improvement in revenue margins and assist margins towards its targeted levels (which implies upside of 470 basis points from current levels).
Despite a moderating premium rate environment, earnings growth is underpinned by several factors. These include organic new business, improved roll-out of technology to drive efficiencies and inorganic opportunities (i.e. acquisitions). Regarding the latter, management continues to seek Merger & Acquisition opportunities across International and Retail Broking. Cash and undrawn debt of $375m provides ample capacity for further acquisitions.
However, with macro tailwinds slowing as premium rates slow and interest rates moderate, EBIT margin expansion in FY26 may be slower to emerge.
Can AUB Improve Tysers’s Performance?
By way of background, in early May 2022, AUB announced the acquisition of Tysers, a Lloyd’s wholesale broker, which was partly funded by an $350m equity raising. Tysers is a leading London-based specialist international insurance broker and at the time of the acquisition was the 6th largest Lloyd’s marketplace wholesale broker.
Despite AUB increasing Tyser’s scale via additional acquisitions, financial performance has been disappointing. EBIT margin in FY25 declined by -70 basis points to 23.5%, with the segment experiencing higher costs than management expected in FY25. However, there are several factors supporting EBIT margin expansion in Tysers International for FY26, including: i) The non-recurrence of ~A$14.5m Tysers bonus realignment costs, ii) Cost-out strategy to drive mid-/back-office efficiencies and, iii) Improved alignment of the EBIT margin for UK Retail business with the wholesale business. The EBIT Margin for Retail (~17%) is lower than that for Wholesale (~25%).
Fundamental View
AUB shares are currently trading on a 1-year forward P/E multiple of ~16.5x, which is below the average of ~19.5x over the last five years. However, the 5-year average encompasses a period in 2021/22 where AUB shares were trading at a significantly-elevated premium due to strong rates of premium growth.
In contrast, over the last ~2 years, AUB’s multiple has averaged ~18x, with the retracement reflecting a gradually softer premium rate cycle. On this basis, the current multiple is not at an attractive enough discount to warrant a favourable view, especially given:
i. Risks in progressing EBIT margin expansion towards medium-term EBIT margin targets. These risks include continued weakness in NZ Broking and slowing macro tailwinds (i.e. slowing premium rates slow and lower interest rates).
ii. Relative to an underlying EBIT/EPS growth profile of +8%/+9% over FY25-28 on a CAGR basis, respectively, the current multiple appears to render the risk-reward profile unfavourable.
From a fundamental point of view, it would therefore be more desirable to obtain AUB at a cheaper price.
Charting View
AUB has been trading in a channel for the past few years. At the moment it is at the mid-point of that channel and is heading lower. Investors looking to get into AUB can be patient and wait for cheaper levels closer to $30.
Michael Gable is managing director of Fairmont Equities.
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