AUB Earnings: Lifting Margin Targets as Acquisitions Propel Growth

We increase our AUB Group fair value estimate by 14% to AUD 33, with shares 12% undervalued against our revised valuation. Most of the increase reflects higher medium-term earnings estimates. In addition to insurance price increases expected to continue at a double-digit rate in fiscal 2024, compared with our prior mid-single-digit forecast, margin improvement across the firm in fiscal 2023 prompts us to raise our midcycle assumptions for each division. Our midcycle group EBITDA margin of 37% is up from 36%. This is a material step up from the 33% reported in fiscal 2023. The Australian broking and agency businesses continue to benefit from operating leverage on rate increases, New Zealand should enjoy reduced technology spending, and Tysers is expected to extract cost savings.

Underlying profit increased 74% to AUD 129 million in fiscal 2023. The big profit growth is largely driven by acquisitions, 45% from Tysers, and 17% from other acquisitions. But strong insurance rate rises and operating leverage within the business contributed to a still-solid 12% organic net profit growth. EBIT margins, excluding the lower-margin Tysers acquisition, expanded 160 basis points to 35.6%, underscoring our long-held view the acquisition was a good one and not a sign of growth challenges.

Our fiscal 2024 net profit forecast lifts 10% to AUD 166 million, the top end of guidance, to incorporate higher commission income and margins. We forecast compound EPS growth of around 9.5% per year over the next five years. Extraction of cost and revenue synergies associated with Tysers looks on track, with the 26.1% EBIT margin well above our initial expectations. On premium increases and cost savings, we forecast Tysers margin lifts to around 28% by fiscal 2026, up from our previous estimate of 25%, but it is still below management’s medium-term target of 32%. We are likely more conservative around the need to share the profit upside with staff to ensure high staff and customer retention.