Austbrokers sticks to diversification plan

Mark Searles - Fairfax
“How important is diversification for us? Very,” says Mark Searles, chief executive of Austbrokers. Photo: Jessica Hromas

Mark Searles, chief executive of Austbrokers, admits it’s hard not to be affected by the volatile movements in the company’s share price since its profit downgrade in January but has stressed he is sticking to a diversification strategy to restore investors’ faith in the broking giant.

When Austbrokers warned in January a downturn in broker earnings would affect its earnings, halving its growth expectations to zero from 5 per cent for fiscal 2015, investors savaged the stock, sending it down from $10.10 to $8.35 on one day. The plunge remains fresh in Mr Searles’ memory.

“I can always remember the day [of the downgrade] – it was Friday, January 23, and we said that premium rates were down,” he reminisced. “At the end of the day, the share price fell 17.5 per cent. There was a mismatch or a misunderstanding between insurance premium rates and how it would flow into our business.”

The price has not recovered, closing at $8.38 on Friday after plunging as low as $7.54 in August.

The profit downgrade came at a time amid a tough commercial insurance market due to rampant competition. Price cuts have been the norm, and brokers who rely on commissions have seen their revenue pool shrink as insurers slash premiums to amass market share.

“From my point of view, it’s fascinating running a listed company because at the end of the day, you’re constantly looking at the share price and clearly you can’t help but be affected by what happens on a daily basis,” Mr Searles said.

“But at the end of the day, I keep saying to the market, look at the score board – listen to what we’re saying, then back us over the medium to long term.”

The message that Mr Searles is attempting to hammer through is a continuing of the group’s strategy of revenue diversification. Austbrokers reaps three quarters of its revenue from broking activities in Australia and New Zealand, with most of its clients in the small to medium enterprise sectors.

Non-broking growth area

Austbrokers sourced about 12 per cent of its profits from non-broking activities in 2012. This has nearly doubled to 23 per cent of net operating profits just three years on, as the group ramps up its acquisitions and business activity in the underwriting agency and risk services sectors. It is a figure the company is seeking to grow.

Under his watch, the group’s underwriting agencies division posted a 29 per cent jump in revenue during 2015, primarily through organic growth and increasing contributions from start-ups in the past three years.

Austbrokers entered the risk services space in 2014 after it bought workers compensation provider, Procare Group. The division has gone on to make further acquisitions, and specialises in claims management and rehabilitation services.

The last division outside broking is that of group services and corporate costs, which focuses on improving the group’s operating model by developing services and systems for its various broking and partner businesses.

“How important is diversification for us? Very,” he said. “It’s helping protect our profit generation going forward.”

Austbrokers, which has a market valuation of $507 million, posted a 0.7 per cent rise in net profits to $34.9 million for the year to June 30. The company declared a final dividend of 27.7¢ a share, and recorded a 3.1 per cent rise in commissions and fees from brokers that focus on non-commission based income and through its acquisitions.

“My belief is everything that we’re doing is to shareholder benefits and … to the long term, sustainable growth of the business. That will eventually get replicated in the share price,” he said.

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