Company Reports

We think it is highly likely that narrow-moat PSC Insurance will be acquired by United Kingdom-based insurance broker The Ardonagh Group, with the parties entering into a scheme implementation deed. Cash consideration of AUD 6.19 looks fair, representing a 19% premium to our stand-alone valuation of AUD 5.20 per share and 33% above PSC’s three-month volume-weighted average price to March 12, 2024—the date at which speculation of a potential takeover was first published. The deal is subject to shareholder approval, court approval, and approval from regulatory bodies, including the Foreign Investment Review Board and the Australian Competition and Consumer Commission. A scheme booklet will be sent to PSC shareholders in due course, and a vote on the scheme is expected to take place in September 2024. PSC shareholders do not need to take any action at this time.

PSC Insurance is an intermediary between small and large companies and insurers, enjoying a high level of recurring revenue given sticky customer relationships and insurance essentially seen as a necessity. Primarily operating in Australia, New Zealand, and the UK, PSC owns broker and underwriting businesses, and runs a network for independent brokers to access the benefits of being part of a larger group. PSC has made modest investment in Hong Kong, with future acquisitions likely if initial investments perform well and management gain better insight and comfort with the businesses. We estimate PSC accounts for around 3% of the intermediated general insurance market in Australia (in terms of gross written premium), much smaller than Steadfast and AUB Group.

PSC Insurance reported a solid first-half fiscal 2024 result and modestly increased full-year guidance. While 12% EBITDA growth is strong, premium rate increases and acquisitions help mask weakness in the United Kingdom. It has been all one-way with premiums for several years, but softer market conditions in cyber and mergers and acquisitions insurance lines kept UK earnings relatively flat. Encouragingly, management noted signs of a recovery with the recent decline reflective of market activity. Less demand results in premium rates falling, and operating leverage for an insurance broking business hurts on the way down. Narrow-moat PSC being diverse across regions and products helps offset weakness and, in particular, the insurance line. There could be a silver lining in the fact that more challenging times bring a renewed focus on discipline, both in chasing new customers and servicing existing customers.

PSC Insurance is an intermediary between small and large companies and insurers, enjoying a high level of recurring revenue given sticky customer relationships and insurance essentially seen as a necessity. Primarily operating in Australia, New Zealand, and the U.K, PSC owns broker and underwriting businesses, and runs a network for independent brokers to access the benefits of being part of a larger group. PSC has made modest investment in Hong Kong, with future acquisitions likely if initial investments perform well and management gain better insight and comfort with the businesses. We estimate PSC accounts for around 3% of the intermediated general insurance market in Australia (in terms of gross written premium), much smaller than Steadfast and AUB Group.

Australia’s three largest independent insurance broker networks, Steadfast, AUB Group, and PSI Insurance have all guided to continued profit growth in fiscal 2024. Steadfast reaffirmed its outlook at the annual general meeting today. Taking the midpoint for profit growth guidance, AUB Group is the strongest at 23%, followed by Steadfast at 14%, and PSI Insurance at 7%. AUB Group is benefiting from earnings accretion from Tysers and other small acquisitions, and Steadfast is similarly acquiring growth with increased ownership of brokers already operating within its network. Our forecasts are at the top end of guidance.

PSC Insurance is an intermediary between small and large companies and insurers, enjoying a high level of recurring revenue given sticky customer relationships and insurance essentially seen as a necessity. Primarily operating in Australia, New Zealand, and the U.K, PSC owns broker and underwriting businesses, and runs a network for independent brokers to access the benefits of being part of a larger group. PSC has made modest investment in Hong Kong, with future acquisitions likely if initial investments perform well and management gain better insight and comfort with the businesses. We estimate PSC accounts for around 3% of the intermediated general insurance market in Australia (in terms of gross written premium), much smaller than Steadfast and AUB Group.

We increase our PSC Insurance fair value estimate by 6% to AUD 5.20, with shares around 5% undervalued against our revised valuation. Most of the increase reflects higher medium-term earnings estimates. In addition to faster insurance price increases than we originally expected, continued margin improvement in the agency business surprised. We had forecast margins to trend lower as the insurance cycle turns, but now expect flat margins as acquisitions and new product launches leverage the existing cost base. We assume only a modest margin decline over the next five years. PSC’s insurance agency EBITDA margin of 55% betters Steadfast at 50% and AUB at 38%.