One of the biggest floats of the year looks to be that of general insurance broking outfit Steadfast. The promoters of the float say they are offering $334 million worth of shares at a price representing between 14.4 times to 15.5 times 2014 pro forma earnings. The pro forma numbers are arrived at by essentially assuming that the newly structured company has been up and running for several years.
Managing director Robert Kelly is seen by insiders as being instrumental to the prospects of the float, such is his influence in the industry.
Steadfast Group Limited was formed in 1996 with the bringing together of 43 independently owned insurance brokerages into a buying group better able to compete against the big corporate brokers and to get better deals for members. Member firms sell relatively complex insurance products to small and medium-size enterprises and charge commission and fees for the service.
In the prospectus, Mr Kelly is described as a co-founder of the company.
Industrial floats of size have been few and far between of late. While the offering by financial products distributor iSelect is yet to trade above its offer price following the departure of its register of several key shareholders, IVF group Virtus has performed well. The performance of Steadfast on listing is therefore important to the sentiment of the market and the timing of further floats.
By most accounts the general insurance broking industry can be attractive to potential investors. The performance of Steadfast rival Austbrokers since its listing in 2005 is held up as an example of what can be achieved.
General insurance broking does not incur the direct cost of claims that can make the earnings of the big insurance underwriters such as Suncorp, IAG and QBE volatile. Low capital intensity, an ability to dial up fees in the soft part of the insurance cycle and relatively low labour costs relative to commission income are other attractive attributes of the industry for potential investors.
There is also a view that the broking industry is still something of a cottage industry, with more than 800 small firms operating around the country, many of which would benefit from consolidation.
The share price performance of Austbrokers has been impressive. In 2005, shares were offered at $2 each - representing a forward price to earnings ratio of 9.6 times and a 6.5 per cent yield. At the time investors were warned that the commercial insurance cycle (which can be volatile) was expected to remain soft. After trading for several years at a forward multiple of around 12 times, Austbrokers has enjoyed a dramatic re-rating over the past couple of years and now trades at more than $10 a share - representing a multiple of more than 17 times 2014 expected earnings.
Investors have increasingly grown comfortable with Austbrokers' model of typically taking 50 per cent stakes in individual broking firms and the relatively (until recently) measured pace at which it has made new investments for many years.
Steadfast is taking something of a different approach. The proceeds of the listing will be mostly used to purchase stakes in 62 broking firms (who are members of the current buying group) and related businesses. In other words, overnight Steadfast will emerge with stakes in more broking firms than Austbrokers. The opportunities and the risks of the Steadfast business therefore look to be greater than Austbrokers, at least in the short-term.
The cost of purchasing stakes in broking firms has been on the rise in recent years as competition for distribution assets has increased. Where stakes in firms once changed hands at around 4.5 times earnings before tax, interest and amortisation, in more recent times investments are being made at around 7 times. The international brokers such as AON and Marsh are always looking to increase their footprint in Australia, while the big underwriters (or product manufacturers, if you prefer) such as QBE and Allianz are likely to want to invest in Steadfast just as they already have in Austbrokers.
The Steadfast buying group includes more than one in four of the active broking firms in Australia.
Stewart Oldfield is a research analyst at Wilson HTM Investment Group.