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Steadfast IPO buoys the market

There’s nothing like a ‘stag profit‘ to boost the market. Shareholders lucky enough to get hold of shares in Steadfast Limited (ASX:SDF) at the IPO price of $1.15, are currently sitting on a nice paper profit of more than 20%, with the shares trading around $1.39 at lunchtime.

Steadfast is one of the biggest floats of the year, larger than iSelect Ltd (ASX:ISU) and Shine Corporate (ASX:SHJ), but smaller than Virtus Health (ASX:VRT). Although, Steadfast has rapidly overtaken all of them in market capital, hitting $760 million. The Initial Public Offer (IPO) was not open to the public, with $334 million worth of shares issued either through brokers and to a select list of investors.

If you’ve not heard of Steadfast, it’s an insurance broker similar to Austbrokers (ASX:AUB). Steadfast will have an interest in 62 insurance broking businesses, four underwriting agencies, a 50% equity interest in Macquarie Premium Funding, as well as a number of ancillary businesses. Steadfast also provides services to approximately 280 insurance broking businesses across Australia and New Zealand.

The proceeds of the IPO will give Steadfast the fund to diversify its business away from purely providing services to insurance brokers, to one with underwriting capabilities, as well as equity interest in a number of brokers as I mentioned above.

The market certainly has high expectations of the company. In 2012, Steadfast made a $6 million profit, with ‘hockey stick like’ forecasts of net profits of $27 million and 30 million in the 2013 and 2014 financial years respectively. For a company with a market cap of $760 million, that’s a prospective P/E ratio of 28 in 2013 and 25 in 2014 – not cheap by anyone’s standards.

Steadfast expects to pay a fully franked dividend in 2014 or between 3.6 to 5.2 cents, equating to a dividend yield of 2.6% to 3.7% at current prices.

Foolish takeaway

At current prices Steadfast looks expensive compared to Austbrokers, which trades on a P/E ratio of around16. Foolish investors may want to wait and see if the company lives up to its prospectus forecasts, before making an investment.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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