A boring but beautiful stock with 5-year CAGR EPS growth of +16.8%

This article was written by Michael Carmody. 

PSC Insurance Group's (ASX: PSI) FY23 result didn’t provide any significant surprises post a recent earning upgrade from the company, but it did deliver another year of consistent organic growth.

The group delivered underlying revenue growth of +17%, underlying EBITDA growth of 19% and dividend growth of 13%. Despite inflation pressures, the business delivered impressive cost management and scale benefits.

The outlook for the business remains attractive. Customer demand for specialised insurance brokering services remains strong in an environment where prices and underwriting complexity continue to increase. In addition, the company’s well-established international acquisitive expansion strategy is set to continue.

The management team provided FY24 earnings guidance, implying growth of +10% to +14%. Further acquisitions could potentially accelerate this growth in the next 12 months. If the last year is any indication, earnings guidance will be upgraded several times during the year. The company’s stated goal of doubling earnings over the four-year period from FY21 remains on track.

A bit of history…

We have owned PSI since the IPO in December 2015. The company listed at $1.00 a share and post the FY23 result the stock is trading at $4.93 a share. A PSI share purchased at IPO has delivered a 463% return. If you invested $10K at IPO it would be worth $56,320 today. In contrast, a $10K investment in the S&P/ASX Small Ordinaries Accumulation Index would have delivered a return of $17K.

Initially, we were attracted to the business model’s track record for earnings growth. Prior to listing, the business had grown from a single business unit in 2006 to a diversified international group of start-ups and acquired operations. In addition, the business offered an attractive return on invested capital, free cash flow, a strong balance sheet and an experienced management team.

What you need to know off the back of PSI’s result

The result confirmed that organic growth was a key driver of the result. The management team at PSI continue to successfully add new operations, including start-ups, to the business without compromising underlying performance. Importantly, the opportunity for further inorganic growth that is accretive to both earnings and capital employed provides significant valuation upside potential for the stock.  

Insurance broking remains very much a “people business”. Despite the challenges associated with managing geographically disparate business units and a large workforce, the management team has created a constructive culture that promotes autonomy and accountability across the broader group.

Boring but beautiful

Investors hate uncertainty, particularly in the current risk-averse environment. While the FY23 result for PSI was pre-announced and somewhat predictable, beauty is in the eye of the beholder! For the record, we see 5-year CAGR EPS growth of +16.8% as “beautiful”. Consistent earnings growth, margin expansion and free cash flow are all too rare in the Australian listed equity market. “Boring is beautiful” and in no small way contributes to the share price outperformance this year.

We see the biggest risk for PSI as a poor acquisition. Overpaying for an asset or failing to integrate a new business could erode the corporate culture and adversely impact the group’s long-term performance.

We continue to hold off the back of PSI's result

The stock remains a core holding in the portfolio. The company has re-rated from its IPO PE multiple of 17.9 times in FY16 to 21.4 times in FY24 during its listed life. Holding the stock for the last seven and a half years has delivered strong shareholder returns. The stock trades at a premium to the market based on expectations the company will continue to deliver on its above-market growth strategy. We all know that past performance is no guarantee for the future but can see many reasons to stay long the stock at this point in the cycle. At this stage, we have no plans to change our “buy and hold” PSI investment strategy.