1 June 2020
Randall & Quilter – FY Results
Share Price 137p
Mkt Cap £292m
Conflict disclosure: I Hold
- Results PBT up 180% to £40.1m. NAV/share 148p. EPS 21.4p. Program premium up 147% to $369m generating commission of $12.9m (3.5%), which generated an inaugural “economic” EBITDA of $1.8m. The segmental analysis shows a loss of £1.9m. Economic EBITDA is IFRS EBITDA plus “unearned EBITDA”. Having made 16 acquisitions the legacy business achieved a ROE of 24%, up from 20%. The program business is expected to generate $842m premiums from existing contracts in 2020 (+128%). The company re iterates its 2022/3 target of $50m “economic EBITDA” from program management. The company is excited about the future.
- Estimates Pre tax profit is modestly below consensus while post tax is ahead. EPS od 21.4p is ahead of the 18.6p forecast. An 11% decline in PBT is anticipated ion the current year.
- Valuation It may be reasonable to anticipate $50m EBITDA from the program business albeit not until 2022.23 on an economic basis, so perhaps a year later on an IFRS basis. The segment net assets in the legacy business is £338m, 16% ahead of the current share price.
- Conclusion Given the company has since raised £100m at a price below NAV it may be fair to discount the NAV. However the program business is delivering and it is possible to see the shares double over the next 2 years as long as the company doesn’t dilute further.
28 April 2020
Randall & Quilter – Investment
Share Price 145p
Mkt Cap £292m
Conflict Disclosure: I Hold
- Investment Brickell Insurance, controlled by a Miami based private investment firm, 777 Partners invests in US$ 80m preferred shares exchangeable at £1.35/share, a 7% discount, while Hudson Structured Capital invests in $20m ordinary shares at £1.35/share. The accompanying trading update says 2019 results expected to be in line. Preferred stock prevents Brickell breaching 30% of the company, is perpetual and is entitled to a 6% distribution. Funds will be used to invest in the program and legacy business.
- Estimates.This amounts to 27% of the company being issued at a 7% discount so is very dilutive dilutive. If the preferred stock can be treated as 6% debt than it is 7% dilutive to the share count, but it depends on how the auditors view the conversion right.
- Valuation. December 2020 estimates anticipate £29.3m post tax profit which may be conservative given recent legacy deals announced. A 6% distribution to preferred stock would cost £5m pre tax or say £4m post tax, while ordinary shares increase by 7% implying perhaps 11.8p available for ordinary shareholders vs the current 14.9p. The NAV was £302m at June 19 and the shares are being issued at a valuation of c£270m.
- Conclusion The company has been buying stock in the market at 145p only last week which makes it hard to understand issuing £80m at a discount without pre emption rights. The recent acquisition announcements gave no numbers but perhaps they were large. Stewards inquiry may be needed.
7 October 2019
Randall & Quilter – Revisit
Share Price 208p
Mkt Cap £407m
Conflict Disclosure: I Hold
- Revisit The shares have risen 12% in the last couple of days on no news save a tip in the Telegraph last week. So it may be worth checking the valuation
- Estimates In the year to December 2019 PBT is expected to be £41.2m which is entirely from the legacy insurance run off contracts. The program business is not yet contributing to profit. In 2020 this is forecast to decline to £38m as legacy contracts have been busy this year and less are anticipated next year.
- Valuation The NAV is £302m so the shares now trade at a 32% premium to book value. Stripping out goodwill moves this to a 54% premium to book value. The company is anticipated to make a 11.5% ROE this year. If we say the legacy book is worth the NAV of £300m then we are paying £100m for the program business. The company states it expects $1bn of premium income to be put through the program business in 2020. At say 4% commission this would be perhaps £32m of revenue so this implies 3X predicted revenue, which is perhaps about right in the short term, although we may expect the business to grow more than that in the medium term.
- Conclusion Whether it is the Telegraph tip or the fact that Brexit, from which RQIH’s program business will benefit I am not sure. But the shares have run strongly last week and in the short term may be up with events. But for those with a medium term perspective these gyrations don’t matter.
21 August 2019
Randall & Quilter – New Program Partnerships
Share Price 158p
Mkt Cap £310m
Conflict Disclosure I Hold
- Partnerships The company announces two new program management partnerships for Paragon where they will provide licenses and capacity for Paragon in New York specialist commercial transport. Also a UK MGA, Sophro will use R&Q to provide after the event insurance, while the existing First Underwriting MGA has extended its program partnership. There are no specific numbers attached to these but the statement says the company expects a “significant uplift in 2019 to the $500m of GWP premium underwritten in 2018 and the pipeline of program opportunities continues to grow.
- Estimates Last year’s PBT of £14.3m had no contribution from the program business, while this year’s £41.6m PBT estimate is largely driven by the significant number of book transfer deals. The program business is more highly rateable as it is recurring, capital light and high ROCE. If we impute,say a 4% margin on the GWP run rate of $500m, we can get a number of $20m which is high margin.
- Valuation PER is 8.6X, Yield 5.9%
- Conclusion The market has been spooked by the sale of shares around 180p by the CEO. The program business is the area that will be the future and this encouraging update suggests there is plenty of upside as it builds.
3 July 2019
Randall & Quilter – Portfolio Transfer
Share Price 180p
Mkt Cap £353m
Conflict Disclosure: I hold
- News The company has a agreed to underwrite the liabilities of two Californian education insurers. The limit on the cover will be $113m. The transaction has been effected by a portfolio transfer rather than an acquisition. The statement refers to this as a sizable acquisition and notes the company expects to announce a number of additional acquisitions during the rest of the year.
- Estimates No financial effect is given although usually one would expect a profit to be effected when the portfolio is transferred. On Monday this week RQIH acquired a portfolio for $25m when the net assets were $41m. While profits on this type of business are not reliable or growing the returns are potentially high. The ROE estimated this year 20% but forecasts are flat into 2020. These deals will put upside pressure on forecasts while the program management business is continuing to build a sustainable profit stream.
- Valuation PER 9.7X yield 5.3%
- Conclusion Following the sale of shares by Ken Randall and his move to Chairman the shares have been becalmed. The profits are likely to be high this year but the shares are more likely to respond when the program management side of the business starts to deliver.
19 June 2019
Randall & Quilter – CEO change
Share Price 175p
Mkt Cap £350m
Conflict disclosure: I hold
- News – Ken Randall is stepping down as CEO and becoming executive chairman. Roger Sellek and Alan Quilter are to become joint CEO’s
- Valuation PER is 10X and yield 5.35% There is no trading update but the company was on track to achieve £600m of program business by the end of this year which could potentially represent £30m of revenue with little marginal cost. The NAV of the insurance business is £175m.
- Conclusion Ken Randall recently sold 3m shares at 185p and still holds close to 6% of the company. As the architect of the new simplified strategy the market may need some convincing that joint CEO’s is the right solution to succession. Looks like this could be listless until the results prove the positive outcome later this year.
29 April 2019
Randall & Quilter – FY Results
Share Price 181p
Mkt Cap £354m
Disclosure : I hold
- Results Pre-tax profit up 45% to £14.3m represents a return on tangible equity of 5%. Distributions of 9.2p represents a yield of 5.1%. The outlook is confident with the legacy pipeline still strong as well as Brexit benefits and rating upgrades benefitting the program management business while the investment return outlook is also significantly improved which when you have c £632m of cash and investment matters.
- Estimates Results look in line with expectations following the December downgrade to 2018 numbers when the Global Re acquisition closure was moved from Q4 18 to Q1 19 which is estimates at £13m of profit. Current year PBT estimates are for c. £48m PBT, a significant increase from the £14.3m just reported. The statement re iterates the target of $500m premiums from program management.
- Valuation The program management business is more highly rateable than the run off business. $500m of premiums may have associated revenue of $20m with little marginal cost associated with it but that will fall into 2020. This could be worth most of the market cap. Add in the run off business at book value which is c. £175m and we could get a value of £525. Which is 270p per share. This ignores the value of the strong profits from the run off business. In the meantime PER is 7Z and yield 5.2%
- Conclusion The significant value is likely to be built from the growth in the program management business. I am very happy with this. One of those examples where a little complexity frightening away investors can result in opportunities for others.
24 April 2019
Randall & Quilter – Regulatory Approval
Share Price 169p
Mkt Cap £332m
Disclosure I hold
- Approval RQIH announced yesterday lunchtime they had received regulatory approval for the acquisition of Global US Holdings Inc. This was the largest ever legacy transaction which was announced last September and was hoped it would close in 2018 as a result of which earnings were moved to the right into 2019. It is likely this will result in a one off profit on acquisition in 2019 as well as ongoing earnings.
- Estimates No change was made to forecasts. With a downgrade in December for yesterday’s delayed transaction completion and 5 acquisitions as well as 2 fronting deals announced this year we can imagine that forecast risk is on the upside.
- Valuation PER 6.5X yield 5.5%. Last year results were on 30 April.
- Conclusion With two divisions only now perhaps when results come out investors will get greater clarity on the profit streams which may enable a SOTP to be done with confidence. The fronting revenue will grow strongly and recur while the legacy profits are by definition declining. The shares were £2 last October. This should be exceeded when upgrades arrive.
3 October 2018
Randall & Quilter – Acquisition
Share Price 207p
Mkt Cap £261m
· Acquisition At 3.11pm yesterday they announced the acquisition of Coffey’s Irish captive insurance company which will be administered by R&Q’s Malta subsidiary. No numbers are provided. The company says it remains excited about its legacy acquisition pipeline and says it is aware of further acquisitions in Ireland. It refers to pressures of a soft market, Solvency 2 as well as Brexit driving divestment of insurance books.
· Estimates With no numbers mentioned its impossible to estimate whether this is forecast sensitive. The house broker expects £29m of continuing profits for the current year and it would be expected that when this acquisition completes a release of capital will follow as well as a profit.
· Valuation Before this acquisition the shares trade on an underlying PER of 10.8X December 2018 and yield 4.5% from a distribution which is 2.1X covered.
· Conclusion As interest rates rise the £600m cash which is largely held in dollars will increase earnings along with the unique position the company has in both fronting and run off being better placed in the current structural changes than it has been for 30 years. Since I used to audit the PB Coffey syndicates.
19 September 2018
Randall & Quilter – Acquisition and H1 results
Share Price 181p
Mkt Cap £228m
· Results – H1 profit on continuing operations up 40% to £7.78m. EPS was down from 7.9p to 5.2p following the issue of shares in November 2017. Distrobution of 3.6p (2017 3.5p). Net assets per share 133p (2017 124p). Encouragingly bith the Program Business is ahead of the 12 programs they expected to write and the Run off (“Legacy”) business is now expected to be “substantially” ahead of expectations following the acquisition below.
· Acquisition – The company announces the acquisition of a US property and casualty run off business with net assets of $82m for $80.5m cash. The business delivered a profit of $15m last year. Due to the substantial operational synergies once regulatory approval is obtained R&Q will obtain a capital release resulting in a substantial gain in the current year along with ongoing reserve releases over time.
· Estimates This will result in “substantial” upgrades to the current year estimate of £19.6m PBT. Encouragingly the upgrades come from both sides of the business, with the program business being more predictable than the run off business. The program business targeted 12 programs this year and now expects to exceed this.
· Valuation Last year the company achieved a 17% ROE and made only 6.8% in H1 this year though H2 is likely to substantially exceed this. This should be worth 2X book value which is 235p per share. The PER on current estimates in 13X and yield 6.7% but this is before substantial upgrades
· Conclusion This company has a significant market opportunity over the next 3 years which is now being evidenced by upgrades. I have in mind that it could make £30m profit which would be a 20% ROE. Certainly worth 235p.
25 September 2017
Randall & Quilter – Visit
Share Price 142p
Market Cap £178m
· Analysts can be grumpy. The analyst is an animal that gets up before the birds to trawl through a dark forest of statements and numbers hunting for coded expressions such “larger and take longer” or “extra P&L investment” only to be told the analyst “got it wrong”. Such analysts can start to resemble the feeling they carry inside them of being a swamp dweller.
· Visit So when I arrived at Randall & Quilters offices to meet Mr Randall I was in swamp dweller mood. And occasionally you have a meeting that 10 minutes in you think wow this is exciting. It was one of those meetings. Having now sold off all the non core cash cow businesses effectively with unusual dexterity over the last 6 months converting the goodwill on the balance sheet into cash they have got their credit rating on the Malta Fronting up insurance underwriting (at no capital risk as that’s laid off directly to Munich Re and the hugely profitable run off business.
· Businesses They are left with two businesses. The Run off business sources deals through industry connections, lawyers accountants etc and as long as there is M&A going on there will be deals to do. With Brexit and changing regulation they are confident they have possibly 1-2 years visibility on a pipeline of deals where they re insure (rather than acquire) insurance books providing £10m plus of profit set to grow. This is hugely profitable and they are the market leader where they have done 60 deals against their nearest rival having done 17. Market leadership is key. The second business is fronting which is essentially provising the regulatory umbrella for insurance fintech. When I used to audit Lloyds syndicates there were 350. Now there are 60 big ones and the old specialist syndicates now simply have authority to write business for a portion of the separately owned syndicate and are effectively a broker who has authority to underwrite. Which means these effectively “brokers” (but they prefer to call themselves “managing general agents”) can sell Randall & Quilters tailored product where you can insure for 3 hours on an APP through a fintech company such as Cuvva. They provide the regulatory cover while the risk is passed over to MunichRe; So they get a 5% commission for no risk with fast Fintech type growth. Their Malta registration will also enable to provide this throughout Europe post Brexit which gives them an edge.
· Estimates Shore Capital forecast profits going from £11.4m in 2017 to £17.3m in 2018 to £28,500 at the underlying level while Numis forecast profits going from £11.8m in 2017 to £20.9m in 2018 to £25.1m in 2019. What I learned is that there is considerable visibility over these high growth numbers.
· Valuation PER is 10.3X 2018 falling to 7X 2019. The yield is 6.2% on 2019. One of the remiaing businesses is capital light and high growth and fintechy. That is a PE valuation. If I put that on 15X 2019 EPS I get £135m of value. The run off business may make £16m in 2019, a ROE of c 15%. This would be worth c £150m. So that’s a value of £285m against today’s £178m. That’s 60% upside over the 12 month period it would take for the market to value it on December 2019 earnings. And while we wait we collect a 6.2% yield.
· Conclusion Sometimes swamp dwellers find diamonds in the swamp. Which just ocassionally makes them smile.