MENU

Are these insurance brokers worth buying?

Wesfarmers Ltd (ASX: WES) is believed to be closing in on a further asset sale with the Australian Financial Review revealing details of a planned float of the conglomerate’s insurance broking business which trades as OAMPS.

Having sold off the insurance underwriting operations to Insurance Australia Group Limited (ASX: IAG) for $1.845 billion in December 2013, investors at the time speculated whether Wesfarmers would get out of its remaining insurance broking operations or look to grow and strengthen the division, given it could be considered sub-par in size within the conglomerate structure.

In the half year to 31 December 2013, the OAMPS division reported earnings before interest, tax and amortisation (EBITA) of $41 million and had revenues of approximately $150 million, based on a 27% EBITA margin.

The insurance broking business model has a number of appealing aspects including a recurring source of revenue thanks to sticky clients that annually renew their insurance premiums. There are currently two large listed players in this market.

Austbrokers Holdings Limited (ASX: AUB) is trading at $10 per share which is a long way from its 52-week high of $13. In February the firm reported revenues of $68 million, a 20% increase in adjusted net profit after tax to $13.8 million, with EBIT closer to $22 million for the half.

Meanwhile Steadfast Group Ltd (ASX: SDF) which only listed in August 2013 has seen its stock remain range bound between $1.35 and $1.85. The recent interim results showed revenues of $74 million and adjusted EBITA of $24.5 million.

Foolish takeaway

As the results above show, OAMPS would appear to be a significantly larger insurance broking business than either Austbrokers or Steadfast based on the most recent half-year earnings results. Also of note are the very attractive profit margins all three managed to achieve.

While investors will have to wait and see if Wesfarmers does progress with an initial public offering (IPO) of the OAMPS business, annualising the adjusted earnings of the two listed brokers produces a price-to-earnings ratio of 20.1 and 20.8 respectively for Austbrokers and Steadfast.

These high multiples would suggest it’s an opportune time for Wesfarmers’ shareholders to benefit from a spin-off of the broking arm, but it might not be the most appealing time for buyers of insurance broking stocks.

Attention investors: Brand-new report reveals #1 ASX pick... FREE!

If you'd bought this company's shares in November 2012, you'd already have made 700%! But the massive profits could just be beginning, says one top investor. In our brand-new FREE research report, "Joe Magyer's #1 ASX Tech Stock for 2014," you'll discover the name, code and a full analysis. Simply click here, it's FREE!

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.