Insurance Brokers SECTOR REPORT. Solid Hold. -4% Jun-12. Dec-12. Mar-13. Sep-13. Sep-12. Jun-13. Source: APRA, Baillieu Holst estimates

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1 11 May 2018 RECOMMENDATIONS AUB Group (AUB) Rating HOLD Risk Low Price Target $14.50 Share Price $14.17 Steadfast Group (SDF) Rating HOLD Risk Low Price Target $2.80 Share Price $2.88 RESEARCH ANALYST Nicolas Burgess, CFA nburgess@baillieuholst.com.au Nick Caley ncaley@baillieuholst.com.au Disclosure The authors own no shares in the companies mentioned in this report. SECTOR REPORT Solid Hold Overall: The share prices of both Steadfast Group (SDF) and AUB Group (AUB) recently hit our respective price targets. Whilst the operating environment remains favourable, in our view, we downgrade the ratings for both stocks from Buy to HOLD to reflect fair valuations. Near-term earnings: We see a solid near-term outlook for earnings for both stocks. We expect both companies to deliver around 1 underlying EPS growth in FY18F, supported by company guidance (AUB: top end of 5-1 adjusted NPAT growth; SDF: underlying NPAT $72.5m-77.5m) and a hardening premium rate environment. Looking into FY19F: Absent major acquisitions, we expect both stocks to see a similar FY19F to FY18F. By this we mean premium rate increases in the mid-single digits (%), improving operating leverage aided by reducing technology spend (after peak spend in FY18), and potentially increasing interest rates. That said, we believe these expectations are largely factored into current estimates, with our forecasts and consensus estimates (source: Bloomberg) showing similar levels of growth (FY19F EPS growth AUB: 9% BH, 9% consensus; SDF: 11% BH, 14% consensus). Meanwhile, valuations have returned to top-of-the-cycle levels, with PEs in the low 20s for both stocks. Thus, we conclude the market has fairly assessed the outlook for both stocks and this is reflected in valuation. AUB Group (AUB): We downgrade from Buy to HOLD with unchanged earnings forecasts and an unchanged $14.50 price target. With a forward PE of 20.2x and a dividend yield of 3.2%, we see the stock as fairly valued. Key risks to our view include better than expected earnings leverage given technology spend reductions planned for FY19F (upside) and a stable (rather than improving) premium rate environment (downside). Steadfast Group (SDF): We downgrade from Buy to HOLD with unchanged earnings forecasts and an unchanged $2.80 price target. With a forward PE of 22.4x and a dividend yield of 2.7%, we see the stock as fairly valued. Key risks to our view include accretive acquisitions and/or cost initiatives (upside) and a stable (rather than improving) premium rate environment (downside). Next date: APRA releases its General Insurance Statistics on 24 May 2018, which should provide a good read on the premium rate environment. FIG.1: AUSTRALIA GENERAL INSURANCE ANNUAL PREMIUM GROWTH 12% 1 8% 6% 4% 2% -2% -4% Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Retail market Commercial market Source: APRA, Baillieu Holst estimates Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 1

2 Solid hold Overall: The share prices of both Steadfast Group (SDF) and AUB Group (AUB) have recently hit our respective price targets. Whilst the operating environment remains favourable, in our view, we downgrade the ratings for both stocks from Buy to HOLD to reflect fair valuations. Near-term earnings: We see a solid near-term outlook for earnings for both stocks. We expect both companies to deliver around 1 underlying EPS growth in FY18F, supported by company guidance (AUB: top end of 5-1 adjusted NPAT growth; SDF: underlying NPAT $72.5m-77.5m) and a hardening premium rate environment. FIG.2: AUSTRALIAN GENERAL INSURANCE ANNUAL PREMIUM GROWTH BY QUARTER 12% 1 8% 6% 4% 2% -2% -4% Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Retail market Commercial market Source: APRA, Baillieu Holst estimates Looking into FY19F: Absent major acquisitions, we expect both stocks to see a similar FY19F to FY18F. By this we mean premium rate increases in the mid-single digits (%), improving operating leverage aided by reducing technology spend (after peak spend in FY18), and potentially increasing interest rates. That said, we believe these expectations are largely factored into current estimates, with our forecasts and consensus estimates (source: Bloomberg) showing similar levels of growth (FY19F EPS growth AUB: 9% BH, 9% consensus; SDF: 11% BH, 14% consensus). FIG.3: GENERAL INSURANCE SDF FORWARD PE (X) VERSUS ALL ORDINARIES INDEX Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Steadfast All Ords Source: Datastream, Baillieu Holst estimates Baillieu Holst Ltd ABN Page 2

3 Valuations have returned to top-of-the-cycle levels, with PEs in the low 20s for both stocks. The chart above shows the SDF PE over time, with current levels equivalent to the previous peak of the cycle in In terms of relative premium and/or discount to the market, SDF is trading at a similar premium to the previous peak at around 35%. The chart below shows this correlated to movements in average premium rate growth. We conclude the market has fairly assessed the outlook for both and this is reflected in the stock valuation. FIG.4: GENERAL INSURANCE SDF PREMIUM TO ALL ORDS VERSUS ANNUAL PREMIUM RATE CHANGES 5 8% % 4% 2% 2% 2 4% Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 SDF premium to All Ords Index LHS Annual growth in commercial premium rates RHS Source: APRA, Datastream, Baillieu Holst estimates Investment view Steadfast (SDF): We downgrade from Buy to HOLD with unchanged earnings forecasts and an unchanged $2.80 price target. With a forward PE of 22.4x and a dividend yield of 2.7%, we see the stock as fairly valued. Key risks to our view include accretive acquisitions and/or cost initiatives (upside) and a stable (rather than improving) premium rate environment (downside). Investment view AUB Group (AUB): We downgrade from Buy to HOLD with unchanged earnings forecasts and an unchanged $14.50 price target. With a forward PE of 20.2x and a dividend yield of 3.2%, we see the stock as fairly valued. Key risks to our view include better than expected earnings leverage given technology spend reductions planned for FY19F (upside) and a stable (rather than improving) premium rate environment (downside). Next date: APRA releases its General Insurance Statistics on 24 May 2018, which should provide a good read on the premium rate environment. Baillieu Holst Ltd ABN Page 3

4 Financial summary AUB Group Code: AUB Rating: HOLD Analyst: Nicolas Burgess Price Target: $14.50 Date: 11 May, 2018 Upside/downside: 2.3% Share Price: $14.17 Valuation: $14.50 Market Capitalisation: $896m Valuation method: DCF / PE blend Year End: 30 June Risk: Low PROFIT & LOSS (A$m) FY16A FY17A FY18E FY19E FY20E EARNINGS FY16A FY17A FY18E FY19E FY20E Commission & fees EPS - Underling cash (diluted) Other revenue EPS Growth - underlying 0.5% 6.4% 10.6% 8.8% 7.4% Interest EPS - Reported (diluted) Operating revenue Diluted shares (m) Operating expenses DPS (cps) Minorities Payout Ratio 67% 66% 65% 65% 65% Net corporate costs Franking EBITDA VALUATION FY16A FY17A FY18E FY19E FY20E Depreciation P/E (x) EBITA EV/EBITA (x) Interest expense EV/EBITDA (x) Underlying PBT Dividend Yield (%) 2.8% % 3.5% 3.7% Tax Price/Book (x) Underlying cash NPAT Price/NTA (x) Amortisation Price/FCF per Share (x) Non-recurring (net tax) GROWTH FY16A FY17A FY18E FY19E FY20E Reported NPAT Revenue growth -1.5% 2.6% 8.8% 7.4% 4.8% BALANCE SHEET (A$m) FY16A FY17A FY18E FY19E FY20E Operating cost growth -0.4% -1.2% 10.1% 7.4% 3.5% Assets EBITDA growth 1.2% 17.6% 9.5% 8.6% 6.3% Cash EBITA growth 1.1% 18.3% 9.8% 8.8% 6.4% Cash - Trust PBT growth 3.3% 8.1% 10.2% 8.8% 7.4% Receivables Underlying NPAT growth 3.3% 7.5% % 7.4% PPE Reported NPAT growth 20.4% -11.3% 9.6% 9.7% 8.1% Intangibles Other Assets MARGINS & RETURNS FY16A FY17A FY18E FY19E FY20E Total Assets EBITDA Margin 16.5% 18.9% % 19.4% Liabilities EBITA Margin 15.8% 18.3% 18.4% 18.7% 19. Payables NPBT Margin % % 16.6% Loans & Borrowings ROIC (pre-tax) 17.3% 19.3% 21.4% 25.8% 33.1% Provisions ROE 13.5% 13.5% 14.5% % Other Liabilities ROA 8.2% 9.1% 9.2% 8.9% 8.5% Total Liabilities Effective Tax Rate 30.2% 30.5% Equity GEARING FY16A FY17A FY18E FY19E FY20E Contributed Capital Net Debt (A$m) Reserves Enterprise value Retained Earnings Net Debt/Equity (%) NA NA NA NA NA Minority Interests EBITDA/Gross interest Total Equity BV per share (cps) NTA Per Share (cps) CASH FLOW (A$m) FY16A FY17A FY18E FY19E FY20E Cash at Start Cash Flow from Ops Capex Free cash flow Free cash per share (cps) Cash Flow from Investing Cash Flow from Financing Cash At End Baillieu Holst Ltd ABN Page 4

5 Financial summary Steadfast Group Code: SDF Rating: HOLD Analyst: Nicolas Burgess Price Target: $2.80 Date: 11 May, 2018 Upside/downside: -2.7% Share Price: $2.88 Valuation: $2.80 Market Capitalisation: $2279m Valuation method: DCF / PE blend Year End: 30 June Risk: Low PROFIT & LOSS (A$m) FY16A FY17A FY18E FY19E FY20E EARNINGS FY16A FY17A FY18E FY19E FY20E Consolidated EBITA EPS - Underling cash (diluted) Associates EBITA EPS Growth - underlying 12.5% 6.1% 10.3% 10.7% 6.1% EBITA pre corporate costs EPS - Reported (diluted) Net corporate costs Diluted shares (m) EBITA post corporate costs DPS (cps) Net interest Payout Ratio 55% Amortisation Franking PBT Tax VALUATION FY16A FY17A FY18E FY19E FY20E Minorities P/E (x) NPAT EV/EBITA (x) Dividend Yield (%) 2.1% 2.4% 2.7% % Add back: Price/Book (x) Amortisation Price/NTA (x) Abnormals Price/FCF per Share (x) Underlying cash NPAT GROWTH FY16A FY17A FY18E FY19E FY20E BALANCE SHEET (A$m) FY16A FY17A FY18E FY19E FY20E EBITA growth 31.2% 10.6% 18.4% 13.8% 6.6% Assets PBT growth % 21.5% 13.2% 8.4% Cash Underlying NPAT growth 44.6% 6.3% 13.5% 13.8% 6.1% Cash - Trust Reported NPAT growth 43.5% 9.9% 16.6% 17.1% 8.4% Receivables PPE MARGINS & RETURNS FY16A FY17A FY18E FY19E FY20E Intangibles Operating margin - consol 24.3% 23.6% 24.3% 25.1% 25.8% Goodwill ROIC 8.8% 9.5% 10.8% 12.3% 12.8% Other Assets ROE 9.7% 10.1% 11.1% 12.1% 12.2% Total Assets ROA 7.8% 8.2% 9.1% % Liabilities Effective Tax Rate 29.8% 28.8% Payables Loans & Borrowings GEARING FY16A FY17A FY18E FY19E FY20E Provisions Net Debt (A$m) Other Liabilities Enterprise value 2,413 2,419 2,377 2,366 2,356 Total Liabilities Net Debt/Equity (%) 14.9% 15.3% 10.4% 8.8% 7.4% Equity EBITDA/Gross interest Contributed Capital Retained Earnings Minority Interests OPERATIONAL DATA FY16A FY17A FY18E FY19E FY20E Total Equity Consolidated brokers Equity accounted brokers BV per share ($ps) Underwriting agencies NTA per Share (cps) Ancillary CASH FLOW (A$m) FY16A FY17A FY18E FY19E FY20E MPF Cash at Start Steadfast Cash Flow from Ops Total EBITA Capex Less Associate EBITA Free cash flow Consolidated EBITA Free cash per share (cps) Cash Flow from Investing Associate EBITA Cash Flow from Financing Group EBITA pre corporate Cash At End Baillieu Holst Ltd ABN Page 5

6 This document has been prepared and issued by: Baillieu Holst Ltd ABN Australian Financial Service Licence No Participant of ASX Group Participant of NSX Ltd Analysts stock ratings are defined as follows: Buy: The stock s total return is expected to increase by at least percent from the current share price over the next 12 months. Hold: The stock s total return is expected to trade within a range of ±10-15 percent from the current share price over the next 12 months. Sell: The stock s total return is expected to decrease by at least percent from the current share price over the next 12 months. Disclosure of potential interest and disclaimer: Baillieu Holst Ltd (Baillieu Holst) and/or its associates may receive commissions, calculated at normal client rates, from transactions involving securities of the companies mentioned herein and may hold interests in securities of the companies mentioned herein from time to time. Your adviser will earn a commission of up to 55% of any brokerage resulting from any transactions you may undertake as a result of this advice. When we provide advice to you, it is based on the information you have provided to us about your personal circumstances, financial objectives and needs. If you wish to rely on our advice, it is important that you inform us of any changes to your personal investment needs, objectives and financial circumstances. If you do not provide us with the relevant information (including updated information) regarding your investment needs, objectives and financial circumstances, our advice may be based on inaccurate information, and you will need to consider whether the advice is suitable to you given your personal investment needs, objectives and financial circumstances. Please do not hesitate to contact our offices if you need to update your information held with us. Please be assured that we keep your information strictly confidential. No representation, warranty or undertaking is given or made in relation to the accuracy of information contained in this advice, such advice being based solely on public information which has not been verified by Baillieu Holst Ltd. Save for any statutory liability that cannot be excluded, Baillieu Holst Ltd and its employees and agents shall not be liable (whether in negligence or otherwise) for any error or inaccuracy in, or omission from, this advice or any resulting loss suffered by the recipient or any other person. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Baillieu Holst Ltd assumes no obligation to update this advice or correct any inaccuracy which may become apparent after it is given. Baillieu Holst Ltd ABN Australian Financial Service Licence No Participant of ASX Group Participant of NSX Ltd Melbourne (Head Office) Address Level 26, 360 Collins Street Melbourne, VIC 3000 Australia Postal PO Box 48, Collins Street West Melbourne, VIC 8007 Australia Phone Facsimile melbourne@baillieuholst.com.au Adelaide Office Address Ground Floor, 226 Greenhill Road, Eastwood SA 5063 Postal PO Box 171 Fullarton SA 5063 Phone Facsimile adelaide@baillieuholst.com.au Bendigo Office Address Level 1, Forest Street Bendigo, VIC 3550 Postal PO Box 84 Bendigo, VIC 3552 Phone Facsimile bendigo@baillieuholst.com.au Geelong Office Address 16 Aberdeen Street Geelong West Vic 3218 Postal PO Box 364 Geelong Vic 3220 Australia Phone Facsimile geelong@baillieuholst.com.au Gold Coast Office Address Suite 202 Level 2, Eastside Building 6 Waterfront Place, Robina QLD 4226 Phone Facsimile goldcoast@baillieuholst.com.au Newcastle Office Address Level 1, 120 Darby Street Cooks Hill, NSW 2300 Australia Postal PO Box 111 The Junction, NSW 2291 Australia Phone Facsimile newcastle@baillieuholst.com.au Perth Office Address Level 10, 191 St Georges Terrace Perth WA 6000 Australia Postal PO Box 7662, Cloisters Square Perth, WA 6850 Australia Phone Facsimile perth@baillieuholst.com.au Sydney Office Address Level 40, 259 George Street Sydney, NSW 2000 Australia Postal PO Box R1797 Royal Exchange, NSW 1225 Australia Phone Facsimile sydney@baillieuholst.com.au Baillieu Holst Ltd ABN Page 6