Is Austbrokers Holdings Limited a buy?

Insurance Broker Austbrokers Holdings Limited (ASX:AUB) looks good for the long term.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Insurance broker Austbrokers Holdings Limited (ASX: AUB) reported mediocre results for 2015. Although revenues rose 12% to $202.6 million, net profits were up just 0.7% to $34.9 million. On an underlying basis, profit after tax was up 3% to $36.3 million.

The company has a complex corporate structure thanks to its "owner-driver" business model, whereby it acquires between 50% and 100% of insurance related businesses and leaves the pre-existing owners in control of operations. As a consequence, profits in any year are impacted by various one-off amounts relating to corporate activity, hence the difference between underlying and statutory figures.

Despite difficulties such a complicated structure causes when reading the accounts, the "owner-driver" strategy has worked out very well for the company so far. Earnings per share have grown from 25.1 cents in 2007 to 56.9 cents in 2015 and return on equity is 14.8% before amortisation, which is high for a serial acquirer like Austbrokers.

More recently, the company has diversified into underwriting and risk services with promising results. Profit from underwriting agencies grew 25% to $16.7 million and profits from risk services increased 206% to $3.7 million in 2015. Austbrokers achieves economies of scale by centralising corporate services and the risk services and broking divisions offer complimentary services to clients.

During 2015, the company expanded into its first overseas market in New Zealand where it recorded a small profit of $1 million. Its 80% owned subsidiary is now the third-largest broker group in the country after it acquired the largest broker 'cluster' group and 50% of the biggest independent broker.

Insurance is a cyclical market and in Australia we are currently experiencing a downturn. Brokers earn a fixed percentage on premiums they sell and so falling prices are putting pressure on profit margins. This explains the lacklustre performance of Austbrokers in 2015, although the fact that the business managed to grow at all is a testament to the strength of the company and its management.

However, the market does not appear to share my admiration as the company's share price is down 23% over the last 12 months. This would be understandable if the stock was richly priced to begin with but this does not appear to be the case. A year ago, shares traded at $10.75 with a price to earnings ratio (PE) of just over 18x based on 2014 underlying profits.

If the price seemed reasonable a year ago then it is even cheaper today with shares now costing $8.25 equating to a PE of just over 14x based on 2015 underlying profit. In addition, the company has plenty of cash to offset its moderate debt levels and has just announced an increase in dividends.

Foolish takeaway

Austbrokers presents an attractive opportunity for investors today. It is a growing market-leading business with a strong track record and focused strategy which costs just 14x earnings and pays a 4.8% fully franked dividend yield. The stock is unloved by the market because profit growth appears to be slowing, but this is temporary and will reverse when the insurance market recovers.

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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »