Ann: Investor Presentation and Conference Call Details, page-11

@andy777 and @Just_a_guy ,

While this update was not unexpected, I am somewhat surprised at the market's response to it, because:

1. it wasn't overly material (expected growth to be 3%-5% from "lower end of 7%-12%");
2. the market had clearly already pre-empted a downgrade (based on the share price decline in recent months),
3. the reasons for the lower expectations is, I think, plausible, confined to very specific issues, and were well-articulated.

No matter; in the short term, the market does what it does and often there is very little accounting for it.

The important thing to contemplate is the future prospects for the company and on that score, nothing has changed at all in my mind: the insurance broking business will keep on keeping on in its usual cyclical ebb and flow, in the process generating the significant free cash flow (OCF covers maintenance capex by a factor well in excess of 10 times).

On the speculation about the new CEO front-loading costs, the tone of yesterday's conference call suggested to me that there has almost certainly been an element of hollow log creation, although the extent of this is difficult to quantify.

The fact that organic earnings in the core broking business will be negligible (can be deduced by stripping out the acquisition impacts and adjusting for the Risk Services hit as well as the accelerated IT expenses) despite premium rates still growing (albeit at a slower rate), indicates a meaningful investment in expenses.

Onto the more important subject of valuation, I don't have any deeper or keener insights into what FY2020's earnings might look like, other than they are likely to be at least slightly higher than FY2019's underlying result (they had better be, otherwise the business is broken or the premium cycle has fallen into a massive hole, because of the near-$100m of acquisitions that will make their debut full-year contribution in FY2020, the seeming hollow logs that have been established and the fact that premium rates going into the end of this year are still firming).

So, for easy maths, assume growth of around 5% in FY2020 on this year's implied $46.5m UNPAT; that takes us to around $49m, or EPS of some 67cps, which corresponds to a P/E multiple of around 15.5x.

That, I don't think is an at all demanding valuation multiple for a well-managed business, with significant and resilient cash flows and a track record of growing EPS at a rate between 7% and 9%pa over the past decade.

For context, here is AUB's 12-month prospective P/E multiple (annual average and high-low range) over time, showing the prospective 2020 valuation point in the context of the stock's history:




As can be seen, AUB's P/E rating can be broken down into two distinct periods:

1.) 2009 to 2013, when the multiple averaged around 13.4x.
2.) post-2014 when it has averaged 17.7x

In my view, the discount-to-market P/E multiples of that earlier period fundamentally undervalued the company (AUB is a far better quality company than the average listed company), while in the past few years, the multiple was too rich.

Intuitively, I believe that a P/E multiple somewhere in between the averages for these two periods reflects a reasonable and appropriate P/E multiple, so somewhere around 15 times.

Which is where AUB is currently.


Accordingly, I am adding to my 3% portfolio position.