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.
