03 November 2017 INTERNAL ONLY RECOMMENDATIONS Rating BUY Risk Medium Price Target $0.85 Share Price $0.50 SNAPSHOT Monthly Turnover $13.0mn Market Cap $169mn Shares Issued 239.7mn 52-Week High $0.97 52-Week Low $0.34 Sector Financials BUSINESS DESCRIPTION FIG acts a specialist provider of products generally classed as Life Insurance under the relevant legislation in Australia such as life insurance, final expenses (funeral insurance), accidental death, accidental injury and mortgage protection. FIG seeks to design, manufacture, undertake marketing/lead generation, distribute and administer a simple range of products that are ideally suited to direct distribution and/or the general advice segment of third party distribution 12-MONTH PRICE & VOLUME RESEARCH ANALYST Nick Caley + 613 9602 9283 ncaley@baillieuholst.com.au Nicolas Burgess, CFA + 613 9602 9379 nburgess@baillieuholst.com.au Disclosure The author owns no shares in FIG. Baillieu Holst Ltd acted as Underwriter for FIG and earned fees in relation to that activity in the past 12 months. Freedom Insurance (FIG) COMPANY REPORT Expected halftime lead upset by leads 1H18 profit warning: FIG has announced that 1H18 EBITDA (ex the profit on sale of its Noble Oak investment) is likely to be in the range of A$7.5-$9.0m (our forecast was A$11.2m) versus A$11.1m in 1H17. FIG management commentary is that: 1) 1H18 net revenue is expected to be 3-11% higher versus 1H17 but largely due to trail commissions from the growing in-force book; 2) operating expenses of A$19-$20m for 1H18 will be in line with FIG s expectations and will include new product development; and 3) after a strong start to new sales in the traditional final expenses product, FIG cited a period in which it was adversely impacted by poor quality leads, which has negatively impacted conversion rates this has since been addressed with lead providers and FIG is citing a recovery to normal run rates by the end of 1H18. FIG expects new sales will be 9-15% lower than the pcp in 1H18. New product roll-out: FIG cited sales for new products of around A$1m for 1H18, which it states is in line with expectations. It has also signed an agreement with Peakbound Holdings to provide additional call centre capacity. FY18 outlook: FIG expects 2H18 earnings and sales to exceed 2H17 due to a larger in-force book, growth in sales and new products. Costs are expected to increase due to the investment in lead generation, marketing and infrastructure. Our view: A disappointing announcement for a company that had exceeded expectations since IPO. Our previous concern was that the launch of new products would detract from the focus of sales for the final expenses product. Management commentary suggests this has not been the case, with the quality of leads being the issue. We expect management to quickly correct this issue, although it appears this will leave a gap versus market expectations for FY18. Changes to forecasts: We have downgraded FY18/19/20 forecasts by 15%/11%/8% respectively. Investment view: BUY with revised DCF valuation of A$0.84 (prev.a$1.11) and price target of A$0.85 (prev. A$1.10). Whilst we expect today s announcement will depress FIG s share price for a number of months, we maintain our BUY call in view of: 1) valuation stock continues to trade on single-digit P/E despite today s downgrade; 2) management has vast experience in the Australian life insurance industry we are confident they will be quick to address events that have led to the downgrade; 3) focus on a range of simple products in a market where larger players have lost favour due to the complexity of products and general conduct; 4) new products likely to improve group average persistency due to premiums being paid in the first year; and 5) a debt free balance sheet with growing cash balance and low capital intensity. INVESTMENT SUMMARY Year End: 30 June 2016 (A) 2017 (A) 2018 (E) 2019 (E) 2020 (E) Revenue $mn 30 54 61 71 78 EBITDA $mn 7.6 22.3 21.6 27.7 32.4 EBIT $mn 7.6 22.3 21.6 27.7 32.4 Reported Profit $mn 3.0 14.1 17.4 19.4 22.7 Adjusted Profit $mn 3.9 15.0 15.1 19.4 22.7 EPS (Reported) 1.3 6.7 7.2 8.0 9.4 EPS (Adjusted) 1.6 7.1 6.3 8.0 9.4 EPS Growth % 25.8 336.7-11.7 28.3 16.9 PER (Reported) x 39.6 7.4 6.9 6.2 5.3 PER (Adjusted) x 30.4 7.0 7.9 6.2 5.3 Dividend 0.0 0.0 0.0 0.0 0.0 Yield % 0.0 0.0 0.0 0.0 0.0 Franking % 0 0 0 0 0 Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 1
Financial summary Freedom Insurance Group Analyst: Nick Caley Rating: BUY Date: 03-November-2017 Price target: $0.85 Current share price: $0.50 Valuation: $0.84 Year End: 30 June Risk: Medium PROFIT & LOSS (A$mn) FY16A FY17A FY18E FY19E FY20E Market Capitalisation A$m $169 Upfront Fee Revenue 23.1 34.2 35.9 40.9 44.8 EARNINGS FY16A FY17A FY18E FY19E FY20E Trail Commission/Admin Fees 5.0 5.4 12.6 16.5 20.1 EPS - Diluted 1.3 6.7 7.2 8.0 9.4 Trail Asset Movement 11.7 20.1 20.0 22.7 24.9 Normalised EPS 1.6 7.1 6.3 8.0 9.4 Clawback Provision Management -4.3-7.6-10.2-13.6-16.8 EPS Growth (%) 26% 337% -12% 28% 17% Adviser Commissions -6.0 1.4 3.0 4.2 5.5 DPS 0.0 0.0 0.0 0.0 0.0 Total Revenue 29.5 53.5 61.3 70.7 78.4 Franking (%) 0 0 0 0 0 Total Expenses 21.9 31.2 39.7 43.0 46.0 Payout Ratio (%) n/a 0% 0% 0% 0% EBITDA 7.6 22.3 21.6 27.7 32.4 Depreciation & Amortisation 0.0 0.0 0.0 0.0 0.0 VALUATION FY16A FY17A FY18E FY19E FY20E EBIT 7.6 22.3 21.6 27.7 32.4 P/E (x) - Reported 40.0 7.5 6.9 6.2 5.3 Net Interest Expense 1.2 0.7 0.0 0.0 0.0 P/E (x) - Normalised 30.7 7.0 8.0 6.2 5.3 NPBT 6.4 21.6 21.6 27.7 32.4 Dividend Yield (%) n/a 0.0% 0.0% 0.0% 0.0% Income Tax Expense 2.5 6.6 6.5 8.3 9.7 EV/EBITDA (x) 11.6 8.7 1.7 1.3 1.1 NPAT - Normalised 3.9 15.0 15.1 19.4 22.7 Price/Book (x) 7.1 2.2 1.7 1.4 1.1 Normalisation Adjustments -0.9-0.9 2.3 0.0 0.0 Price/NTA (x) 10.8 2.5 1.7 1.4 1.1 NPAT - Statutory 3.0 14.1 17.4 19.4 22.7 GROWTH FY16A FY17A FY18E FY19E FY20E Statutory EBITDA 7.6 22.3 21.6 27.7 32.4 Revenue Growth (% pcp) 45% 81% 15% 15% 11% Less Trail Asset Movement 11.7 20.1 20.0 22.7 24.9 Operating Exp. Growth (% pcp) 39% 42% 27% 8% 7% Less Clawback Provision -4.3-7.6-10.2-13.6-16.8 EBITDA Growth (% pcp) - Statutory 62% 193% -3% 28% 17% Cash EBITDA 0.2 9.8 11.9 18.7 24.3 EBITDA Growth (% pcp) - Cash n/a 4800% 21% 57% 31% BALANCE SHEET (A$mn) FY16A FY17A FY18E FY19E FY20E EBIT Growth (% pcp) 62% 193% -3% 28% 17% Current Assets NPBT Growth (% pcp) 45% 238% 0% 28% 17% Cash 7.1 26.9 42.1 55.0 72.0 NPAT Growth (% pcp) 15% 370% 24% 11% 17% NPV Of Future Trail Commissions 3.2 5.9 9.9 14.5 19.5 Normalised NPAT Growth (% pcp) 26% 285% 1% 28% 17% Other 4.8 4.8 4.8 4.8 4.8 Total Current Assets 15.0 37.6 56.8 74.3 96.2 MARGINS & RETURNS FY16A FY17A FY18E FY19E FY20E Non Current Assets EBITDA Margin % - Statutory 26% 42% 35% 39% 41% NPV Of Future Trail Commissions 20.5 37.9 53.8 72.0 91.9 EBITDA Margin % - Cash 1% 18% 19% 26% 31% Other Assets 3.5 3.7 1.8 1.9 2.0 ROIC % 33% 75% 76% 85% 91% Intangibles 5.8 5.8 0.8 0.8 0.8 ROE % 45% 50% 26% 25% 23% Total Non Current Assets 29.8 47.4 56.4 74.7 94.7 ROA % 34% 42% 24% 24% 23% Total Assets 44.8 84.9 113.2 149.0 190.9 Effective Tax Rate % 39% 31% 30% 30% 30% Current Liabilities Payables 4.1 4.2 4.2 4.2 4.2 GEARING FY16A FY17A FY18E FY19E FY20E Clawback Provision 7.8 15.4 25.7 39.3 56.1 Net Debt (A$mn) 4-27 -42-55 -72 Loans & Borrowings 11.6 0.0 0.0 0.0 0.0 Net Debt/Equity (%) 26% Neg Neg Neg Neg Other 0.0 2.3 2.3 2.3 2.3 Cash from Operations/EBITDA % -29% 39% 39% 47% 53% Total Current Liabilities 23.4 21.9 32.1 45.8 62.6 Non Current Liabilities Operational FY16A FY17A FY18E FY19E FY20E Provisions 0.1 0.1 0.1 0.1 0.1 New Annual Premium Inflows A$m 32.9 64.4 66.6 75.8 82.9 Deferred Tax 4.5 8.4 11.3 14.1 16.5 In Force Annual Premium Income A$m 65.8 109.2 146.5 183.3 218.2 Loans & Borrowings 0.0 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.0 0.0 0.0 New Business - Annual Premium Inflows Total Non Current Liabilities 4.5 8.5 11.4 14.2 16.6 Protection Plan (Final Expenses) 51.5 64.4 61.6 66.5 71.8 Total Liabilities 27.9 30.4 43.6 60.0 79.2 Premium Life/Freedom Essential Life 0.0 0.0 2.5 4.7 5.6 Contributed Capital 9.1 32.6 30.3 30.3 30.3 Loan Protection 0.0 0.0 2.5 4.7 5.6 Reserves 0.0 0.0 0.0 0.0 0.0 Total 51.5 64.4 66.6 75.8 82.9 Retained Earnings 7.8 21.9 39.3 58.7 81.4 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Equity 16.9 54.5 69.6 89.1 111.7 CASH FLOW (A$mn) FY16A FY17A FY18E FY19E FY20E Cash at Start 1.3 7.1 26.9 42.1 55.0 Cash Flow from Ops -2.2 8.7 8.3 13.1 17.0 Cash Flow From Investing -0.4-0.1 6.9-0.1-0.1 Cash Flow From Financing 8.4 11.2 0.0 0.0 0.0 Net Cash Flow 5.8 19.7 15.2 13.0 16.9 Cash At End 7.1 26.9 42.1 55.0 72.0 Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 2
FIG.1: FIG 1H18 GUIDANCE Source: FIG Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 3
Appendix FIG.2: LONG TERM MOMENTUM INDICATORS Source: Iress FIG.3: SHORT TERM MOMENTUM INDICATORS Source: Iress Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 4
This document has been prepared and issued by: Baillieu Holst Ltd ABN 74 006 519 393 Australian Financial Service Licence No. 245421 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 10-15 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 10-15 percent from the current share price over the next 12 months. Baillieu Holst Analysts stock ratings distribution as of 05 September 2017: Buy: 64% Hold: 32% Sell: 4% 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. 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Baillieu Holst Ltd ABN 74 006 519 393 Australian Financial Service Licence No. 245421 Participant of ASX Group Participant of NSX Ltd www.baillieuholst.com.au 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 +61 3 9602 9222 Facsimile +61 3 9602 2350 Email melbourne@baillieuholst.com.au Adelaide Office Address Ground Floor, 226 Greenhill Road, Eastwood SA 5063 Postal PO Box 171 Fullarton SA 5063 Phone +61 8 7074 8400 Facsimile +61 8 8362 3942 Email adelaide@baillieuholst.com.au Bendigo Office Address Level 1, 10-16 Forest Street Bendigo, VIC 3550 Postal PO Box 84 Bendigo, VIC 3552 Phone +61 3 4433 3400 Facsimile +61 3 4433 3430 Email bendigo@baillieuholst.com.au Geelong Office Address 16 Aberdeen Street Geelong West Vic 3218 Postal PO Box 364 Geelong Vic 3220 Australia Phone +61 3 5229 4637 Facsimile +61 3 4229 4142 Email geelong@baillieuholst.com.au Gold Coast Office Address Suite 202 Level 2, Eastside Building 6 Waterfront Place, Robina QLD 4226 Phone +61 7 5628 2670 Facsimile +61 7 5677 0258 Email 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 +61 2 4037 3500 Facsimile +61 2 4037 3511 Email 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 +61 8 6141 9450 Facsimile +61 8 6141 9499 Email 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 +61 2 9250 8900 Facsimile +61 2 9247 4092 Email sydney@baillieuholst.com.au Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Page 5