PSC Insurance Group Ltd (ASX: PSI) is a business you may not have heard much about, as it only listed on the ASX in December 2015. Yet this insurance broker has been growing at a cracking rate and already boasts a market capitalisation of $670 million – a price to earnings (P/E) ratio of 34 times last year's net profit after tax.
Could PSC Insurance be an opportunity today?
The company has a solid financial position, with around $37 million in net cash. Management aims to use this to acquire more insurance brokers both here and in the UK, in a kind of roll-up strategy that has been leading to greater scale and wider profit margins. It is a strategy that has worked so far, and proof is in the pudding with the business growing considerably over the last few years.
It is a little hard to tell from the chart, but if you look closely you can see that the company has been growing its earnings before interest, tax, depreciation, and amortisation (EBITDA) faster than revenue, a clear sign that overall profitability is improving as the business has grown.
PSC is well-funded and has an opportunity to grow significantly over the next few years by continuing its acquisition strategy.
The company's potential is definitely being priced in by the market, at 34x earnings, but for a business earning a return on equity of around 25% this could prove cheap over a 10 year time frame.
A key risk I would want to investigate is the sustainability of the insurance brokerage business, particularly if it is cyclical and/or if there is a risk of insurance companies taking the brokerage function (especially of the reinsurance business) in-house. Even so, PSC looks interesting and is worthy of further investigation, in my opinion.
