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Austbrokers Holdings Limited announces big new acquisition interest

The majority of Austbroker Holdings Limited (ASX: AUB) earnings are still derived from its insurance broking business but over the last couple of years the company has been diversifying from this traditional business line.

It is building up both its underwriting agency business and insurance and risk services consultancy arm. An underwriting agent is similar to a broker except that it can write policies, although neither an underwriting agent nor broker is responsible for paying out claims.

Yesterday, Austbrokers announced that it has acquired a 60% interest in Allied Health Australia Pty Ltd, a provider of workplace rehabilitation services in New South Wales. The acquisition is in line with Austbrokers’ strategy of diversifying into risk services and will cost an initial fee of $8.6 million paid in cash. A further three smaller payments will be made depending on the financials results of Allied Health for 2015, 2016 and 2017.

Allied Health is expected to add 2.0 cents to Austbrokers’ underlying earnings per share prior to funding and acquisition costs, which equates to roughly $1.2 million in incremental earnings. This is not very significant in the context of Austbrokers 2014 earnings of $34.7 million.

The vendors of Allied Health, Kevin Garvey and Lance Morton will continue to operate the business and retain a 40% stake. The deal is an example of Austbrokers “Owner-Driver” business model whereby Austbrokers does not buy the entire business. This ensures that the previous owners who are usually also responsible for running the business, continue to do so with an owner’s mind-set.

Austbrokers is a prolific acquirer of businesses, this being the fourth such transaction in the last twelve months. In November last year, its 80% owned New Zealand-based entity, NZ Brokers Holdings Limited, acquired 100% of BrokerWeb Management Limited and 50% of the newly established BrokerWeb Risk Services. Then in January, Austbrokers acquired 60% of workplace rehabilitation company Altius Group. All four recent acquisitions will help to drive earnings growth over the next 12 months.

Austbrokers has proven to be effective and disciplined when it comes to acquiring businesses. Average return on equity over the past four years has averaged more than 18% and compounded annual earnings per share growth has been 13.5%. Its “Owner-Driver” model partly explains its success along with its habit of tying the purchase price to future business performance.

Foolish takeaway

The purchase of Allied Health Australia represents Austbrokers latest move into the risk services industry. I can’t see any reason why the “Owner-Driver” approach will be any less successful in this segment and after many years of consolidation in the broking sector, there are fewer attractive acquisition options available. In addition, the risk services business should provide a more defensive income stream for Austbrokers since it is less exposed to the insurance cycle. Also risk services is a complimentary business line to insurance broking and there may be cross-selling opportunities available.

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Motley Fool contributor Matt Brazier has no position in any stocks mentioned. You can find Matt on Twitter @MatthewBrazier1.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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