Steadfast Group Ltd (ASX: SDF) shares are having a tough session on Wednesday.
In afternoon trade, the insurance broker network's shares are down 5% to $5.10.
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Why are Steadfast shares sinking today?
Today's decline appears to have been driven by the release of a broker note out of Macquarie Group Ltd (ASX: MQG) this morning.
Macquarie has been looking into the industry and highlights that commission rate cuts are accelerating. It said:
Our market analysis has uncovered an accelerating pace of commission rate cuts. Although Home and Personal Motor products are generally not profitable for insurance brokers, as these products are pushed into the direct channel, we are concerned customer retention for Business Package could deteriorate.
In addition, the broker thinks that the weakness in premium rates that Steadfast has been battling could stay for longer than previously expected. It adds:
We now forecast weakness to last longer than the next 12 months, putting pressure on SDF's ability to hub their wholly owned insurance brokers, which has not necessarily been successful in the past.
This comes at a time when the ASX 200 stock has announced a change of leadership, which is something Macquarie notes can weigh on the performance of a share price. The broker explains:
Our ESG analysts recently reviewed stock price performance for companies undergoing executive changes. 12-month underperformance was witnessed across founder exits, internal replacements and ESG related exits.
Downgraded
In light of the above, this morning Macquarie has downgraded Steadfast shares to a neutral rating (from outperform) and slashed its valuation to $4.90 (from $7.00). This is a touch below where its shares are currently trading.
Commenting on its downgrade and new valuation, the broker said:
Downgrade to Neutral (from Outperform). As commission rates fall and the premium rate cycle threatens to be softer for longer, we downgrade our recommendation to Neutral (from Outperform).
Valuation methodology change: In addition to changing our PERel/DCF methodology to PERel only as the premium cycle slows, we now incorporate a 25% discount reflecting: #1) heightened regulatory attention for Strata, ACCC M&A intervention; ASIC insider trading investigation; #2) increased weight applied to cost-out as the premium rate cycle slows, something which has not been successful in the past; and #3) long term succession risk of the Group CEO at the same time as the CFO and Chair have exited.
