When a takeover bid collapses, investors usually see it as bad news. But in the case of AUB Group Ltd (ASX: AUB) and its failed takeover by private equity suitors, it may actually be good news of sorts.
Macquarie's latest research suggests that it might finally be back to business for the insurance broker network.
A few days ago, AUB confirmed that EQT and CVC had terminated discussions regarding a potential takeover. The suitors decided not to proceed with a binding proposal to buy the company for $45 per share.
For shareholders who were eyeing that $45 payout, it's a hard one to take because AUB Group shares are currently trading at $31.40 per share.
The analysts at Macquarie, however, certainly seem to see an opportunity here.
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Back to business
In a research note released immediately following the news, Macquarie maintained an outperform rating on AUB Group, assigning a 12-month price target of $37.40 to the shares.
Macquarie's message is simple: it's "back to business".
Even without a takeover premium, Macquarie believes the fundamentals of AUB are rock solid. They note that AUB is executing well across multiple earnings growth opportunities and the company has a history of delivering consistent organic growth, supplemented by smart acquisitions.
Why Macquarie is bullish
There are three main reasons Macquarie thinks the stock is a buy at today's prices:
- The Valuation Gap: AUB is currently trading at a forward price-to-earnings (P/E) ratio of roughly 15.6x. That is significantly cheaper than its historical average of 18.3x and cheaper than its recent average of 19.6x. In short, the stock looks like a bargain compared to its own history.
- Broking Strength: Despite fears that insurance premium rates might soften, AUB continues to grow. In the Australian broking segment, average income per client actually increased by 8.4% recently. They are squeezing more value out of existing relationships.
- The International Opportunity: The Tysers (International) business is the sleeping giant here. Current EBIT margins are around 25%, but AUB is targeting 32% over the medium term. If they hit that target, it implies significant earnings upside that Macquarie feels isn't fully baked into the current share price.
Risks
There are still risks, however, to investing in AUB Group, and Macquarie points out that poor M&A execution remains a key risk. When growth relies partly on buying other companies, you have to buy the right ones at the right price and integrate them well into your business. Additionally, if the premium rate cycle turns faster than expected, it could put pressure on earnings.
Foolish bottom line
The AUB Group takeover deal is dead, but the business is very much alive. With a price target of $37.40, offering a potential upside of approximately 19% from the current price, Macquarie suggests that AUB Group represents a good investment opportunity for patient investors.
