AUB Group guides to higher profit

Dragged down by the market’s reaction to the US Federal Reserve’s 75 bps interest rate hike to 4.0%, which saw the local market shed -2% at the open, AUB Group (ASX: AUB) was down -1.70% after the Sydney-based insurance broker raised profit guidance for FY23.

Accounting for the recently acquired 50% stake in UK retail division of Tysers, the S&P/ASX200 company’s new guidance includes underlying net profit after tax (UNPAT) in the range of $107.5m to $115.0m, which represents growth of 45.2% to 55.4% over FY22.

Excluding Tysers (and cost of debt) the group’s revised UNPAT is expected to be in the range of $90.0m to $92.0m, which represents 21.6% to 24.3% growth over FY22.

Revised guidance assumes the following:

• Revised guidance for AUB (excl Tysers and cost of debt) includes 1Q23 results and assumes continued strong premium rate rises for Australia and moderate but accelerating rate rises in NZ.

• Renewals for NZ broking in March and Australian broking in June 2023 are assumed to perform in line with past performance.

• Tysers’ profit contribution and AUB's debt cost are included from 1 October 2022.

What does AUB do?

To the uninitiated, AUB which was founded in 1985, and ASX-listed in 2005, consists of insurance brokers and underwriting agencies operating across 500 locations throughout Australia and NZ.

The group works with more than 850,000 clients to place $4bn in insurance premiums with local and foreign insurers.

UK growth strategy

AUB Group CEO Michael Emmett notes Tysers - which was acquired as part of a strategy to grow in the UK and diversify the group’s insurance intermediary business - is performing ahead of the original expectations when the transaction was first announced in May.

AUB acquired a half stake in London-based Lloyd's wholesale insurer broker last September with JV partner PSC Insurance (ASX: PSI) for $880m.

The sixth-largest wholesale broker in Lloyd’s marketplace, with annual gross premiums of $3.6bn, Tysers was initially expected to increase AUB’s underlying pro forma earnings by 30%.

What happened at FY22

• The insurance broking group reported a 13.3% uplift in FY22 underlying net profit to $65.3m compared to a year ago and were up 22.2% from a “continuing operations” basis.

• Reported Net Profit After Tax (NPAT) of $80.8m (FY21: $70.6m), up 14.5%.

• Fully franked final dividend of 38.0 cents per share (FY21: 39.0 cps), was down -2.6% taking FY22 total dividend to 55.0 cents per share.

What brokers think

AUB’s share price is down around -5% over 12 months.

Consensus on AUB is Strong Buy.

Based on Morningstar’s fair value of $27.66 the stock appears to be undervalued.

Based on the three brokers that cover AUB (as reported on by FN Arena) the stock is trading with 17.2% upside to the target price of $24.79.

An earlier than expected completion of the Tysers acquisition drove a 3% upgrade to Macquarie’s earnings per share (EPS) assumptions for FY23.

With 25% of Tysers' revenues in GBP and 55% in US$, the broker expects hedging to reduce earnings impacts for AUB.

Macquarie maintains an Outperform rating and target price of $24.07. (06/10/22).

Broker updates are likely to follow.

AUB Group's share price got caught up in the market's fear over rate rises in the US today.