Been reading some interesting press regarding the impending IPO of Steadfast group. This is the float of an insurance broker network for between $1 to $1.20 a share. Have decided to run the ruler over it the prospectus to see what I can find, especially in comparison to the existing insurance Broker group that is in the ASX, AustBrokers (AUB.AX)
Couple of things stand out straight away. There is no doubt that AustBrokers is the better business when you look at ROE. AustBrokers in 2012 had a NPAT of $30 million on Net Assets of $172 million or a ROE of around 17%. However Steadfast has the better margins for profitability. But ignore the Balance sheet at your peril. Ultimately, all roads lead to ROE.
Steadfast's combined entity is predicting NPAT of 30 million on Net Assets of $500 million in 2014, a miniscule 6%. IF we assume that the two companies have a similar cost of equity of around 8.9% (calculated using the CAPM for AustBrokers), Steadfast will struggle to provide any returns to shareholders.
In fact, if I make some assumptions about the IPO in that it floats 517,000,000 shares at $1.10, the story gets worse. Assuming the dividend forecast for Steadfast in 2014 is correct ($19,500,000 allocated), the predicted dividend is thus $0.038 a share. Assuming the best case scenario (that a dividend payout ratio of 85% exists), that means the sustainable growth for the company is around (0.06*(1-0.85) =1%). If we adjust the Cost of capital of Steadfast to incorporate its lower dividend yield (say 0.086) and throw it into the Gordon Growth model, we have a valuation per share of 0.038/(0.086-0.01) = $0.64 a share. This is around half the value of the IPO. Great for the brokers and managers, not so great for us investors.
Contrast this with AustBrokers. The number of shares outstanding is around 55,396,000.
Dividend payout ratio is around 67%. Therefore sustainable growth ratio = 0.17*0.33 = 5.7%.
Current dividend = $0.33 a share. Next years dividend will then be 0.33*(1.057)= 0.35 a share.
According to the Gordon Growth model, we have a valuation per share of 0.35/(0.089-0.057) = 11.06 a share. This compares favourably with the current market price of AustBrokers ($10.92 a share)
I know which business I would rather invest in, even if the market value of AustBrokers closely matches it's intrinsic value. Still, I could be wrong about my assumptions. I guess we will find out in around a month when the shares start trading.
Disclaimer: This is not a recommendation to invest, not invest in the IPO of SteadFast or buy/sell shares in AustBrokers. Please consult your Financial Advisor
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