Technology Sparks Interest In Steadfast

This story features STEADFAST GROUP LIMITED. For more info SHARE ANALYSIS: SDF

Brokers are enthusiastic about the potential of the new client trading platform demonstrated by Steadfast Group at its investor briefing.

-Around 80% of the network GWP could be transacted through the platform in five years
-Should premium rate increases continue then upside risk is considered significant
-Benefits expected to accrue to client, broker and insurer
 

By Eva Brocklehurst

Insurance broking network Steadfast Group ((SDF)) is buoyed by the prospects inherent in its new client trading platform and the potential to take the opportunity global by replicating aspects of its model on the Unison Steadfast network.

At its investor briefing the company demonstrated its technology strategy and client trading platform, offering details on monetisation. Management is spending $50m on monetising the technology although is not yet able to provide hard targets and timeframes.

Still, Steadfast estimates that around 80% of the network gross written premium (GWP) could be transacted through the platform within five years.

Macquarie calculates this implies a target of around $3.7bn in premium. Should the company, therefore, be able to execute on 30% of the targeted opportunity the uplift to operating earnings (EBITA) would be around $13m.This compares with an FY18 guidance range of $160-170m.

Outlook

The broker believes market conditions and the outlook for the trading platform, as well as the capacity for acquisitions, underpin the stock. Ord Minnett agrees, equating the earnings implication of the platform to a 20% uplift to FY22 pre-tax profit. The broker believes the stock will also benefit from the cyclical turn in the Australian commercial cycle.

Unison Steadfast, a network of 200 brokers operating in 130 countries, is not yet on the platform but the company is in the process of aggregating all GWP data to facilitate discussions with global insurers and this aggregation process is likely to be completed by the end of June.

Meanwhile, the performance of underwriting agencies has been strong, driven by early traction on the trading platform, pricing cycle tailwinds and aligning agency product with distribution. Steadfast expects expenditure on technology will reach a maintenance stage by FY21.

The London "super" binder is on the platform and live in four business lines. Credit Suisse suggests this should readily enable Steadfast to scale up business in London and provide exposure to products not yet offered in these markets.

The broker allows for some level of success in its earnings forecasts, incorporating a 5% take up in FY19 and a further 5% in FY21. Assumptions for premium rate increases are pulled back to 1.5% over coming years, from the current 6.5%, which offsets this take-up. Hence, the broker forecasts growth to slow.

Should the positive premium rate environment continue into 2019 and 2020, in addition to the higher technology take up, the upside risk will then be significant. In sum, Credit Suisse adopts a cautious outlook on the potential in regard to hard earnings forecasts.

Macquarie believes network brokers should be attracted to this platform as a result of the improved efficiency and the additional commissions paid by underwriters. The company also shares in improved profitability via the 64 equity brokers as GWP placed through the platform increases.

The platform also facilitates better data analytics and market insights and Ord Minnett expects the company may also be able to charge underwriters for data from its platform.

All the large insurers have already signed up to the trading platform, with the exception of CGU, and this is expected to improve the take-up among brokers.

Benefits

The company envisages benefits for all three levels of the insurance transaction. The platform provides large data analytics capability for insurers, which should facilitate adjustments to pricing as comparisons are made with other market operators.There will also be reduced distribution costs and access to the Steadfast network for all policies on the platform.

For insurance brokers there is minimal data entry for each insurer and the ability to assess all market quotes upon renewal. Time is reduced on generating quotes and comparing policy documents, while there is access to leading insurers with no access costs. There is also a fixed, transparent commission fee structure.

For the client there is improved pricing competition, consistent policy wording to ensure quotes are providing the same level of cover, and firm quotes instead of indicative prices.

FNArena's database shows three Buy ratings for Steadfast. The consensus target is $3.13, suggesting 11.9% upside to the last share price.

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