"The industry used to look at GWP multiples but now more on EBIT and therefore aligning with normal M&A. Also MGAs are only takeover attractive when they reach a certain size." — Yes, I agree with you, LHR. And, my understanding is that above >$100m in GWP, an MGA becomes very attractive (as mentioned in my earlier posts). Interested to hear if that aligns with your view? That's not far away from where ENA is today at c.$60m GWP. Thus, I don't believe my assumptions on MGA valuations are incorrect. From my understanding, in Dec 2020, AUB Group acquired 360 Underwriting Solutions. 360 Underwriting Solutions drives a combined annual GWP of $170 million and was valued at A$127 million, reflecting a 75% valuation of GWP.
"Growth you are seeing is that of any startup. Do not assume this growth will remain as it enters maturity and the concept of a ‘new insurance market’ disappears." — Of course, that's the normal lifecycle of any business. But, I don't believe ENA is anywhere close to reaching its maturity stage. I don't think I've ever suggested that ENA would be able to grow at current rates in perpetuity? Personally, I think 20-25% YoY growth is feasible for the next 2-3 years (while maintaining cash flow positive operations) and this top-line growth will then moderate over time. Once the business does mature and assuming it is profitable at the time, ENA has hinted that dividends would be a possible strategy and certainly a good way to reward shareholders.
"Even though they sold previous profitable assets they announce they are in the market for more acquisitions. These are hard to find and now very expensive. Organic growth will decrease accordingly to industry normalcy." — As you know, following the board and leadership team overhaul, a new strategic direction was established in 2018 under executive Chairman Tony Leibowitz. The new focus enabled ENA to commence building its operations internationally, predominantly as a ManagingGeneral Agent (MGA) with large insurance capacity lines on a global basis. Consistent with this strategy, ENA subsequently disposed of 100% of the issued capital in Savill Hicks Corp Pty Ltd for consideration of $4.1million AUD, and the sale of its loss-making Australian operations. Corporate overheads were also reduced inFY18 with the office relocation. To me, that sounds like sensible strategic decision making, and Tony Leibowitz's ability and backing is a major reason I find ENA attractive as a shareholder. As to further inorganic growth (acquisitions), I don't believe ENA would be willing to purchase anything at an overly inflated valuation multiple, that's not a concern of mine.
"The board now apart from Kent has no insurance experience. Banks have tried unsuccessfully for years to run insurance businesses and cant do it. Haven't seen one survive yet run by inexperienced management in the industry. Especially those that sell profitable businesses only to dilute shareholders further and acquire others virtually in the same space." — Personally, I'm very comfortable with the quality, industry credentials and integrity of the current management team and board. I take your point regarding Tony's lack of insurance industry credentials, but Tony's credentials with ASX listed companies, particularly ASX PLS, are quite extraordinary. As a shareholder, I'm very happy to have him as Chair. I don't think it is necessary for every board member to have an insurance background. In fact, I think that would be counter-productive.
"They buy because it's their livelihood and of course, they have a positive view and are in it for years and years to come." — LHR, how many ASX companies have you seen where the management team and Directors take a salary and never put any of their hard cold cash into the company at all? I see it all the time. The fact that TL and TK have significant amounts of skin in the game with ENA is a HUGE positive in my eyes. I can't see how this could be viewed in any other way? It seems strange that you are trying to spin their significant insider ownership as a negative? That's not the framework I use for successful investing.
"Just why would it double, there are simply no reasons due to the numbers either." — Well let's do the numbers and find out. I think it is quite easy to justify a 50c valuation using various methods, including EBIT or EBITDA. For example, let's assume ENA grows at 25% YoY for the next 2 years. For the half-year ending 31st Dec 2021 ENA reported $3.6m AUD in revenue. On a run-rate basis, ENA is thus doing $7.2m in revenue as of the end of CY21. Fast forward 2 years at 25% YoY growth and ENA could be doing $11.25m in revenue by the end of CY23. On a 30% EBITDA margin, ENA would be doing $3.375m EBITDA at this stage. ASX:AUB, ASX:SDF and ASX PSI trade on 18-22x EBITDA. If we apply a 30% discount to these multiples for the smaller size of ENA, we arrive at an estimated 13-15x EBITDA multiple range for ENA. This leads to a projected valuation of $44m to $51m. With 90m SOI, that corresponds to a share price range of 49c to 57c. Of course, the above is a purely hypothetical situation, but I don't consider any of the above assumptions as being unreasonable? 25c to 55c over 2 years would be a 48% p.a. return. Or if you relax the assumptions above even further and assume the above plays out over 3 years (and not 2 years), then 25c to 55c over 3 years would be a 30% p.a. return. No stock is without risk, but I think this is a particularly compelling situation myself. That's just me. Everyone needs to arrive at their own conclusion and time will be the ultimate test.
Thanks for your thoughts LHR and I wish you good luck with your investments elsewhere. I'd be quite happy to see a steady market-beating return play out here with ENA (let's see how it goes) — from my own experiences, attempting to "max out returns" with some form of hot stock elsewhere is laden with risk and often backfires. But, if you can find better returns elsewhere, I wish you luck.
Always good to have discussions like this on these threads and hear counter-perspectives, so thank you, it helps me sense check my investment thesis. There will always be bulls and bears at every price, that's what makes a market.
