PSC Insurance Earnings: Growth To Continue Even as Rate Tailwinds Eventually Subside

We increase our PSC Insurance PSI 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%.

Underlying EBITDA increased 19% to AUD 111 million in fiscal 2023, in line with last month’s upgraded guidance. It is 7% higher than the original guidance from 12 months ago. Growth was split 60/40 organic and acquired. The 11% organic growth is similar to peer AUB Group, showing the industry tailwinds of revenue growth and operating leverage. EBITDA margins lifted 40 basis points from an already strong 37%.

Narrow moat PSC missed out on the acquisitions of Tysers retail broking business and more recently Honan Insurance, but still made 13 smaller acquisitions in the year which will contribute around EBITDA of AUD 7 million on an annualised basis.

Incorporating higher commission income and margins, our fiscal 2024 EBITDA forecast rises 4% to AUD 129 million, the 16% growth modestly above the top-end of management’s guidance. Our forecasts include the already-acquired agency business Ensurance and another AUD 3 million of EBITDA from unannounced acquisitions or increased equity stakes. Management’s guidance for 12% growth at the midpoint does not factor in new acquisitions. We forecast compound EPS growth of 8% per year over the next five years.

The 60% franked final dividend of AUD 8.3 cents per share takes full-year dividends to AUD 15.5 cents, at the low end of the 60% to 70% range.