Steadfast Group Limited

Company Overview: Steadfast Group Limited (ASX: SDF) is engaged in the provisioning of services to Steadfast network brokers, the distribution of insurance policies through insurance brokerages and underwriting agencies, and related services. The Steadfast network provides services to broker businesses throughout Australia, New Zealand, Asia, and London. Steadfast network brokers and underwriting agencies generated billings of over A$10 billion in 2021. The company possesses an equity stake of 60% in unisonSteadfast, a global general insurance broker network with 272 brokers in 140 countries.

SDF Details

Future Growth to be Supported by Synergies from Several Acquisitions: As per the company’s report, the Australian insurance market stood at ~$106 billion in FY21, equating to $25 billion in private health insurance, $56 billion in general insurance, and $25 billion in life insurance. SDF is focused on the intermediated general insurance market, wherein the company recorded intermediated general insurance GWP of $29 billion in FY21. The company experienced decent growth in earnings in the past years, which has been backed by consistent annual acquisition activity. During FY21, SDF wrapped up numerous acquisitions for a total investment of $172 million.  The company continued the acquisition trend in 1HFY22 and finished EPS accretive acquisitions (including Coverforce) for a cost of $507 million. The company’s balance sheet is in a decent position with a consolidated gearing ratio of 19.7% at the end of 1HFY22, which is below the maximum limit of 30% of the Board. As of 22 February 2022, SDF had $315 million of unutilised capacity available to finance future corporate activity.

Insights of 1HFY22: During 1HFY22, the company experienced record financial and operating results evident by the growth of 19% in underlying revenue to $520.9 million.

• On the back of sustained organic growth in its insurance broking and underwriting agencies as well as its prudent acquisition strategy, the company reported a growth of 26.4% in underlying NPAT to $76.3 million. As a result, underlying EPS (NPAT) rose by 20.5% to 8.41 cents per share (cps).
• SDF posted strong growth of 22.7% in underlying EBITA to $153.9 million, which was mainly backed by organic growth of 10.1% from further increases in premiums by insurers and volume uplift; and acquisition growth of 12.6%.
• During 1HFY22, Steadfast network delivered a gross written premium (GWP) of $5.2 billion, reflecting a rise of 15.6%.
• The company declared a fully franked interim dividend of 5.2 cps, reflecting a rise of 18.2% over pcp.

EBITA Mix (Source: Analysis by Kalkine Group)

Recent Updates:

• Recently, the Commonwealth Bank of Australia has become an initial substantial holder in the company with a voting power of 5.02%.
• On 22 February 2022, the company announced the retirement of Mr Philip Purcell as a director as a part of the implementation of its Board succession plans.

FY21 Operational and Financial Summary: During FY21, the company experienced solid growth in earnings mainly driven by organic growth from insurance broking and underwriting agencies, acquisition growth from insurance broking, the continuation of hardening premium market and expense savings.

Financial Summary (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around ~31.06% of the total shareholding, while the top 4 constitute the maximum holding. AustralianSuper and Challenger Managed Investments Ltd. are holding a maximum stake in the company at 5.20% and 4.97%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: During 1HFY22, the company recorded a net margin of 22.4% as compared to 18.9% in 1HFY21. On the leverage side, the company recorded a debt-to-equity ratio of 0.56x in 1HFY22 as compared to 0.81x in 1HFY21.

Margin & Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Operational Risk: The company is exposed to risks arising from loss resulting from inadequate or failed internal processes.
• Financial Risk: SDF’s business could be affected by financial risk arising from failure in achieving its financial objectives as per its business plan.
• Regulatory Risk: The company’s business is exposed to a more complex regulatory environment; any failure in the compliances could lead the business to fines, penalties, etc.

Outlook: For FY22, the company upgraded its guidance for underlying EBITA and NPAT in the range of $330 million - $340 million and $163 million - $170 million as compared to previous guidance of $320 million - $330 million and $159 million - $166 million, respectively. In addition, the company anticipates an underlying diluted EPS (NPAT) growth of between 12.5% - 17.5%. The upgraded guidance is based on the key assumptions, which mainly include continuous premium price increase by strategic partners, achieving total acquisition EBITA targets and no negative consequences from Covid-19. The company believes that the integration of Steadfast management in unisonSteadfast will continue in 2HFY22. Looking forward, the company would be focused on the international expansion of the Steadfast Client Trading Platform (SCTP).

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of SDF is trading below its 52-week low-high average of $3.750 - $5.440, respectively. The stock has been corrected by ~10.12% in the past six months, respectively. The stock has been valued using a P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average, P/E multiple, considering the COVID-19 uncertainties and other material business risks, etc. For the purpose of valuation, a few peers like AUB Group Ltd (ASX: AUB), NIB Holdings Ltd (ASX: NHF), and Medibank Private Ltd (ASX: MPL) have been considered. Considering the expected upside in valuation, growing revenue and earnings, synergies from the recent acquisition, optimistic long-term outlook, and current trading levels, we recommend a ‘Buy’ rating on the stock at the closing price of $4.410, down by ~3.290% as on 07 March 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

SDF Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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