There are several key reasons why this appears to be an excellent strategic move other than the fact that divestments are generally received much more favourably by the market than acquisitions:
The ENA AUS business has higher margins (more tech-enabled) compared to the ENA UK business. Thus, they are re-directing efforts into areas of the company that have more profit potential and that are arguably higher quality.
The valuation appears to be favourable. This is the right time of the insurance cycle to be selling, which has enabled them to achieve an incredible ~30x EBIT valuation on this transaction (~21% p/GWP)*
75% of the sale proceeds will be received in cash, which gives them a $6.15m boost to their balance sheet. At the current market cap of $21m, plus the existing $1.7m held in hand, the Enterprise Value (EV) of ENA is now $21m - $6.15m - $1.7m = $13.15m
25% of the sale proceeds will be received in PSI shares; this is a high-quality ASX-listed company ($1.46b market cap) to have exposure to (an older cousin of ENA of sorts)
ENA can now direct more focused attention to the Australian insurance underwriting market and be laser-focused on the east coast expansion
A potential disadvantage of the decision is that the mix/diversity of insurance sectors in which ENA products are offered will decrease. In addition, there will no longer be a natural seasonality hedge of operating in both the northern and southern hemispheres.
All in all, I think this is a smart move.
Well done to the team.
* For the three quarters to 31st March 2022, ENA UK recordeda record $28.8m GWP, annualising this leads to an estimated ~$38.4m GWP for FY22e.
ENA Price at posting:
24.0¢ Sentiment: Buy Disclosure: Held
