Who said insurance was boring? An avalanche of insurance floats could hit ASX in 2014 as the market eyes several multi-billion-dollar offers. That would follow a rush of mostly impressive insurance floats from last year, and swell sector numbers.
Speculation is rife that Wesfarmers will push ahead with a billion-dollar float of its insurance business, OAMPS. Australia’s biggest mortgage insurer, Genworth, is expected to revive an $800 million-plus float, and the Federal Government could privatise health insurer Medibank Private in the second half in a high-profile $4 billion float.
If those floats happen, the IPO market could eclipse previous capital-raising records, although as always, that depends on the sharemarket’s strength. Some strong performances from insurance IPOs in 2013, although much smaller than those currently touted, show the potential.
Insurance broker Steadfast Group listed in August last year after raising $333.7 million. Its $1.15 issued shares have steady climbed to $1.59 and Steadfast said it was “in a strong position” to deliver full-year prospectus forecasts after reporting a solid half-year result.
Travel insurance provider Cover-More Group listed in December after seeking $521 million through a float. After a sluggish debut, its $2 issued shares have lifted to $2.20. Cover-More spiked in February after a trading update said it was slightly ahead of first-half prospectus assumptions for revenue, underlying earnings and net profit, and reaffirmed full-year guidance.
Insurance-comparison site iSelect sullied what had otherwise been a good year for insurance floats. It raised $215 million in a much-touted IPO and listed in June 2013. The $1.85 shares tumbled to as low as $1.05 after iSelect downgraded revenue forecasts within months of listing, and the Australian Securities & Investments Commission queried aspects of its prospectus.
iSelect’s appointment this month of Alex Stevens as CEO is a good move. But it needs some big wins and more history as a listed company to regain investor confidence. It still looks overvalued. Cover-More and Steadfast have a lot to like, although look fully valued at recent price gains.
Rather than chase newly listed stocks, I prefer established players such as Austbrokers Holdings. It is one the best-performing small-cap companies with a 5-year average annualised shareholder return (capital growth and dividends) of 28 per cent.
Austbrokers’ strategy to consolidate a fragmented market of insurance brokers that mostly service small and medium-size enterprises – and its strong execution – has been well received by small-cap fund managers who recognised the long-term growth potential in the SME market. Austbrokers’ success surely helped demand for the Steadfast IPO and provided an important valuation benchmark.
After stellar share-price gains in first-half 2013, Austbrokers has slumped from a 52-week high of $13 to $10. It was punished in March after maintaining earnings guidance for FY14 at a 5-10 per cent increase in adjusted net profit. Heavy price falls are unusual for this steady performer. Its shares more than tripled between 2010 and 2013.
Austbrokers reported flat premium growth in its commercial products, an SME sector affected by economic uncertainty, and a highly competitive market across all sectors. But was there enough in the half-year report to warrant such a sharp share-price fall from the peak? My hunch is Austbrokers had simply run too far, too fast in 2013, up almost 50 per cent, and was overdue for a pullback.
The good news is recent price falls have brought Austbrokers closer to value territory. It should have a prime spot on portfolio watchlists and would be seriously interesting below $9. The challenge, as always, is buying exceptional companies at bargain prices. The company satisfies the first condition and will achieve the second if its valuation contracts another 10-20 per cent.
Austbrokers has good long-term growth prospects, given the size of the SME market and potential for consolidation of insurance brokers as baby boomers exit the workforce and are eager to sell their insurance brokerages to bigger players.
Another plus is the defensive nature of insurance: love or hate it, small businesses need insurance.
Short term, some headwinds for Austbrokers could ease, perhaps even become tailwinds, if the Australian economy continues to strengthen in 2014 and SMEs become more confident. Austbrokers’ acquisitions, notably InterRISK from 2013, should contribute more in the second half.
A rush of insurance IPOs and stronger performance from those recently listed might also rub off on Austbrokers, which seems to be overshadowed lately by newcomers. I’d buy a high-quality firm with years of history as a listed company over an IPO any day, depending on price.
After its recent weakness, Austbrokers looks better value that Steadfast and Cover-More and, if not flashing green for buy, is finally flashing orange after strong price gains in recent years.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at March 19, 2014.
Click on the links below to read other articles from this week’s newsletter