The first upgrade is never the last

Ron Shamgar

Three weeks ago, we profiled our investment in Freedom Insurance group (FIG) and explained the business model and its clear path to profitable growth over the coming years. Today the company reported its 1HFY17 results with net revenue up 116% to $25.7M, EBITDA up 546% to $11.1M and NPAT up 573% to $7.1M. As we discussed in our previous wire, Freedom Insurance upgraded its prospectus forecasts only 10 days following its IPO. At the time we commented that the business has considerable momentum and is highly likely to upgrade earnings again at the half year results. The company has now significantly upgraded forecasts twice, in a short space of 2 months and we believe a further upgrade is highly likely at the full year results.

The main driver of the strong uplift in sales and profits is attributed to the reduction in lead generation costs which has enabled the company to acquire more leads at a lower cost and convert these efficiently. Combine this with the significant earnings leverage the business has gained at greater scale, and we get very high returns on capital on track for ROE of 50% and ROIC of 80%. This has translated to Cash EBITDA (which differs from the reported figure by excluding non cash movement in the value of the trail book) already exceeding the upgraded forecast given for the full year of $6M, back in December last year. For the 1HFY17 cash EBITDA has come in at $6.8M and is on track for circa $14M for the full year.

Looking at the company's full year guidance of $18 - $21M of EBITDA it is clear to see that by annualising first half earnings the company is already exceeding the upper end of this guidance. In addition, management confirmed the imminent launch of its mortgage protection insurance product next month and further life insurance products towards the end of the year. The company is now sitting on $23M of cash on its balance sheet with no debt, and we expect that in the absence of acquisitions, the company may consider paying dividends next year.

Following the results, revised broker forecasts are now for 6.2c EPS for FY17 growing to 9.5c EPS in FY19. The stock closed at 71 cents today. We value the business at over $1 this year and significantly more if future years forecasts are achieved or once again exceeded. FIG is currently one of the Fund's largest holdings.

You can see our previous post on FIG here: (VIEW LINK)


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