Steadfast Group Limited (SDF) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Steadfast Group Limited 1H '22 Interim Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Robert Kelly, Managing Director and Chief Executive Officer. Sir, please go ahead.

Thank you, and good morning, everybody, and welcome to our half year presentation. It's -- we will start by -- I refer you to Page 5 of the deck we've got there, which is basically a bit of an operating update on how we've gone. And I guess at the top, we've completed EPS accretive acquisitions, including Coverforce for a cost of $507 million net of step downs. And I'll refer to step downs a little bit later in the presentation. So just reflecting on Coverforce that was a wiser acquisition. Our model is to buy companies that are incredibly successful with great strong management teams behind us. And I'd like to say that the cooperation of the management and the teams of Coverforce is exemplary and the integration into the way we operate and the way they operate has been seamless. And Coverforce continues to deliver in accordance with the expectations that we had sort of just the most interesting part of what we're doing now in these presentations is to give you a more definitive view of what our Trapped Capital Project looks like. And -- if you see there, we completed 18 acquisitions, representing $10.6 million EBITA. And then to the right they are on the presentation, you see there's a 30 further indicative valuations being provided, representing an increase of another $16.4 million EBITA. Then next line, we've got 5 term sheets, and we're in due diligence as commenced for another $1.7 million EBITA. And then to the right, you'll see we have a further 27 expressions of interest that are out in the market with our network. All of this trapped capital is for our network, our incumbent network, our existing people, the people that have been involved with us for sometimes 20 years, over 20 years. And then we've got a further 8 term sheets representing another $18.7 million out into the market. And then -- on the right side, you'll see there's 57 further discussions that require us to do. So the Trapped Capital Project is a massive , effective and accretive process that we've been going on to and have been highly regarded and accepted by the network generally. So then if you look at the analysis that our risk group and the product expansion there is putting into the market, it's quite astounding, but we've now completed and are rolling out a comprehensive suite of enhanced risk management tools, solutions and systems to the broker network. They're absolutely built on a world basis that we can pick them up into any jurisdiction we want to do, and they are world class. Now the risk group is an adjunct to what you might say the normal broking operations. And we've been able to create platforms that enable the broker to really lift their scale in the way they deal with their clients and also dial down risks accordingly. So when you get a hard market as we've been through over the last few years. And now you've got a stable market where insurance is expensive to buy. Then the analysis that a broker can actually do in terms of working with the risk transfer of their clients becomes really important in allowing a transfer of risk and an economic savings. So this analysis process that we've done has been that whilst world class is very effective in some particular areas. That's led on to, of course, the establishment of some captives to take risk into specific areas and to allow the consumer of that captive products to share in the risk that they take and also to mitigate the expansive area so that they may be exposed to by risk transferring to the capital. And because of the nature of the market, we are rolling out mutuals. And these are designed to allow people who want to do incredibly good risk management who have an eye to not wanting to make a client and wanting to make sure that every dollar they spend or transferred to an insurer is adequately placed. So the risk group is extremely powerful. It's extremely cutting edge and being well received. And we continue, as you can see there, the enhancement of our product through the client trading platform. Well, and remember, the idea of that was to have enhanced policy wordings, which represent best-in-class based on and developed as a result of the 17 years of looking at errors and omissions as we run our own program there, and also the triage team of our lawyers and our ex-brokers that look at circumstances that are not either covered under the policy or quantum reduce because of inadequacy in the policy. So it's not just the ability to have a contestable platform, it's the ability to roll out a product that meets the expectations of the consumer at all times. I'd point out at that stage that we roll that out for the network. The entire network gets the benefit of all of those products. And in terms of international expansion, we've been involved with unisonSteadfast now for a few years. We stepped up our position there to a majority position. And now we've started to work operationally with unisonSteadfast in Hamburg. And we've been constrained a little bit by COVID over the last 2 and a bit years. So we now have 2 of our very senior executives working hand-in-hand with them. In fact, they've been there last week and this week. And we see this as an incredibly powerful expansion internationally for us, the ability to be able to work with 260 brokers over 130 countries all around the world who all do business currently with unisonSteadfast. So the opportunity to, what shall I say, rather arrogantly Steadfast -- unisonSteadfast is the next iteration of the development of this business internationally. Our London office, which we've had in hibernation over the last 2 years, reopens at the end of February. If any of you are around on the 27th of February, please come down to Lime Street and share a knafeh and a glass of wine with us in April -- sorry, not -- 27th of April -- I'm getting a little bit ahead of myself here. So I think Nick Cook just corrected me on this. I'm glad that I've people around me to protect me with this inadequacies. But the other thing here, which is becoming more and more preeminent is our interaction with our environment and our social governance. And we look at whether -- when you become an ASX listed company, what your obligations are in terms of -- that too your shareholders, in terms of society. And so we have a team working quite diligently certainly, under the express wishes of the Board who see this as an important part of being a publicly listed company is to participate in the environment in a correct way to work to how we can make ourselves carbon neutral. It's a difficult process because it's not a particularly friendly way that people think about this, but we are taking this on with great gusto and our ESG strategy. Once we get a finite and start building towards that carbon neutral position, we'll then be able to roll out to the network. So to enable the 2,000-odd offices that we've got to actually benefit from the work we're doing on ESG. And so in their local environment actually put our footprint towards what carbon neutral would look like for them across a broad church of people across. So we did in this country -- in this company, probably not do enough for the First Nation people, our aboriginal people. And we -- and I talk to you here on land owned by the Gadigal people of the Eora Nation for which we're very grateful that our forebears in this country allowed us to have access to this. And so our reconciliation action plan is something that we just got renewed with great -- but I must say it took a long time to renew it, so it's treated with great, great dignity by this company and also by getting it through. So we're not -- we believe it's important that from the social environment, from an environmental and environment that we actually make sure that we're at the forefront of doing that. And then the last on Page 5 is the claim solutions. We started this last year, and we're now rolling out Steadfast claims solutions for our underwriting agencies. In cohort with our insurance partners, who candidly have come to us and said, it's interesting to see that you -- we delegate authority for you to run the right business and then we give the claims settling authority to somebody who doesn't know anything about it, just looks at in isolation. This system is working really finitely to make sure that the connection between the client, the insurer and the underwriting agency is absolutely quick and the delivery of a claim is expeditious. So that's basically our operating structure. So I will turn you over to Page 6 now. And talk to you about our broking network. And candidly, it's a very good story. It's an easy story for somebody to me that heads up this business to talk to you about you get 15.6% growth. And if you go to the bar chart at the bottom of Page 6 and you have a look at the exponential growth that we're doing across the bottom, it's a wonderful story. And the story is quite simply is this, is that the intermediated business in Australia, the Steadfast network does 36.55% of the intermediated business. It's a wonderful percentage to own, but it's a huge responsibility to have to make sure that everything we do on such a large sector of the intermediated business is representative of best-in-class and what they should do. But organic growth was up 8.3%, and we got price increases across all the lines. So again, 87% of our business is in commercial lines. And Interestingly, now 13% of our business is in retail. So if you go back to 1999, when we did our first start of warehouse, it was 4%, that was the time when people would expect that intermediated house car would fade away from us, we're actually growing each year tremendously powerful. So on the right side, it's a pretty good story to 8.3% organic growth. Interestingly, 3.5% out of our AR networks, we highlight that to show you how that's continually growing. And then 3.8% coming from new brokers. So total growth from that. The network is 361 brokers in Australia, 54 in New Zealand and 19 in Singapore and our investment activity in the first half of '19 new equity holdings, including bolt-ons, and 10 step-downs in equity holdings and 5 step-ups in equity holdings. So the 11-odd people in our M&A team, they certainly are never looking for something to do and are very active in working through it. The client trading platform, okay, it's on track to do $1 billion in GWP this year. It's up 31% from last year. It's heading towards -- doing a rolling 12 to $903 million at the moment, which is up 29% and trending towards the full year at $1 billion. And if people say to you, you're only doing $1 billion on the client trading platform, I'd ask you to reflect on how many other systems around the world are delivering a contestable platform and in 18 to 25 seconds for the consumer, so $1 billion of outstanding. Our equity brokers contributed $123.8 million or up 16% in our EBITA. So -- the network, I reaffirm Steadfast runs a network for everybody. Everything we do is absolutely the same, whether they are a small broker in Wangaratta, we have no equity or a major player in Queensland that were doing a couple of hundred million dollars worth of turnover. Everybody gets the same there, okay? We benefit from our equity participation and for the dividend flow that comes from that. So go to Page 7 now. The underwriting agencies, we've worked on this. I firstly did my first underwriting agency in 1985. So I've seen this in my career as being a way forward to grow business and to deliver better service to the consumer by operating with niche businesses. So the underwriting agencies up 16.3% to $852 million. Now if you reflect on the bottom of Page 7 to the bar chart there, and you look at FY '20, FY '20 was $115 million above FY '19. If you look at FY '21, we were $60 million above the prior year. So you started to get leveling out, you start to say, well, that's okay. We had the original jump from where we have been hard market, so it's going to level out and probably go back to a flat line. And then all of a sudden, you look at it the first half of '22 when we were up $119 million. Now that's because of expertise. It's because of diligence in the delivery of the product and solving the brokers and their clients' problems in a difficult time when markets are constrained and pricing is in flux all the time. So -- just in terms of that uplift, it's price and volume, we're getting price across, but we're also getting volume. And just reflecting on what volume does in an underwriting agency, quite often, you will double or put up 25% more or 30% in sales, but you do not have the same increase in your expense, your expense line stays roughly in accordance with the inflationary effect you'd expect for the base. It doesn't go up in exponential proportions to the sales that you do. So 16.9%, 14.5% organic. As you can see, they're only 1.8% from acquisitions, very small amount of acquisitions. So that means that the 27 agencies that we've got and the over 100 niche products are very well supported by the broking community. Remember, all our agencies are available for the entire market. We don't have anything restricted Steadfast and I believe that competition stimulates the best-in-class of anything that you deliver for the consumer. So if we can have it out in the entire market, it keeps everybody sharp. And I think our excellent performance is due to our long-term strategy of making sure that we provide the capital providers that allow us to deploy their capital into the market with a return. And so -- it's interesting. I've just come back from London, I spent part of that last week and the week before in London. It was an amazing journey this time because everyone of our capital providers wanted to offer more capital to deploy into the Australian and New Zealand market. It's a testament really to the work that we've that we've done on our underwriting agencies. I mean these are not fresh businesses. These are mature businesses diligently worked upon and producing results that benefit the consumer that are expeditious for the broker and make sure that we are able to go to London and know that we've produced a profit for them. So I guess that's about all I can say on the underwriting agencies. If you go to Page 8, this is something that everybody asks us about. So we spent time on this, our tech division. I think the client trading platform has been outstanding in the way that it's starting to gain each month and gain impetus with the brokers. We continue to work on our auto rating capabilities. We discovered really back in the day over probably several years ago that if you don't auto rate product lines, you don't get anywhere with them. So we build every month, we're working on a rating, everything we do, we're working on all our ratings. So we continue to run out those. A great example of that was the motor fleet on which we've now got the major support from the major players in auto rating and that's gaining every month with more and more turnover. So just we have 9 business lines. We've got 16 insurers over that. I was asked yesterday, are we expanding that gift? We're always looking and willing to expand those insurers, providing that they add value into what we want to do for the consumer and also to infill those lines with more and more insurers. But I mean -- the next bullet point there is we have not -- we have 19,201 active users on the client trading platform, of which 8,300 access the client trading platform through our INSIGHT system, our own back office system. And pleasingly, just under 10,000 users access it through Winbeat. And just over 1,126 access it to other broking systems. By any means, by any brew, by any look, that is an outstanding position to have on an automated platform that we are. So -- we get strong client outcomes on the client trading platform. The consumer is well served. It's contestable, the commission rates do not vary. They are fixed. So you do a dollar's worth of business, you get the same commission if you do $100 million worth of business going through. And it really locks together the 3 partners in the insurance transaction, the consumer, the broker and the insurer. It's the best-in-class product. It's contestable and there's no remuneration given for more turnout putting through -- being put through. So everything is aligned. We now have 167 brokers live. And bear in mind, we merged quite a few brokers as we merge brokers, they go back to being one system. And we have an additional 27 committed in our migration program and 76 others that can be -- to be frank, when we get through the order book we've got now that we'll get to from there. So it's pretty simple when you look down on the right-hand side, up 29.2% currently rolling 12 of $903 billion target of $1 billion. And at the bottom, you can see in the bar charts, the growth up $110 million from last year. So these are big jumps in terms of what it should look like. So greatly successful. And I guess probably the most important part is that our interim dividend is up 18.2%. And that really reflects something that as a Board and as a company, we believe we have to do we've to look after our shareholders, we've to look out to our employees and we've to look after the consumer. Stephen, what was the percentage of our -- of an NPATA that we -- this whole impact that we put into that?

Yes. So we typically do -- we have a range -- policy range of 65% to 85% of profits that we pay out as dividends. Profit, there is net profit after tax. So in the last few years, it's really been very close to 75%. I think there's been absolutely conjecture whether it's paid on NPAT or NPATA. It's always been on NPAT. And hence, why you're seeing the dividend uplift here is pretty much matching, I guess, the earnings uplift earnings per share to keep a very similar payout of about 75% of our impact.

Yes. And I mean that's what we've told the market, and it's our Board directive. And I mean, we're absolutely emphatic that we work to that all the time. So the bar chart shows what we want to do accretive growth, share the profit, keep it going forward, do better. So from a sub $0.3 first half in '14, we're at $0.052 in first half '22. So I'll just refer to Page 10, and we've upgraded our guidance. You can see that the underlying EBITA is from $330 million to $340 million and the NPAT is from $163 million to $170 million, and our underlying diluted EPS is from 12.5% to 17.5%. There's a few key assumptions there. They're basically that the market continues really and it's a moderate premium rate increases. Our total acquisition EBITA targets are met. We're pretty confident on those. And we detailed that out to you a little bit earlier. And I think that the technology spend stays and that there's no negative consequences of COVID. Hopefully, Omicron starting to level out. We're going to bring people back into our office on the first of March. And having just spent 10 days in London, I can tell you the way that, that city and country is treating on COVID at the moment is not much different to the flu. We can go around. And that's right or wrong, that system and that City is backing online. And I guess in some ways, we've got to get Australia back online, so we're supportive. I'll just refer to you on the waterfall chart there, the acquisitions and the step down. So every time we do a deal, to bring in somebody in somebody in one of the businesses that we think are high performers and what I want to buy into the business, we moved a bit of that EBITA. So I think in FY '23, we could lose somewhere between $2 million and $5 million EBITA. So that means in organic growth, we have to get that back -- get back to the status quo and then grow over the top. So I'll just point that out to you there that so you've got 8 in acquisitions, 2% in step-down, so you get the 6% uplift from there. So I think that's our guidance. I won't talk any further and I'll hand over to Stephen Humphrys, our CFO, to run through the financial summary. So -- thank you, everybody, and I'll come back to you when that's question time. Yes, Stephen.

Just perhaps a couple of more points on our guidance as to a prelude to going through the first half. Our organic growth expectations have now been lifted on the basis of a good solid first half. So the upgrade in guidance for 2.5% points on the EPS is really driven from that organic growth story. The acquisitions, we're expecting to meet the original target of 6%. It just happens to believe that whilst we think we'll actually buy more businesses this year, that will give us 8% growth because of those step downs in equity holdings. The net of all that will still be a 6% target we had originally. So the step-downs is generally speaking from a -- we had, for instance, a high majority stake, let's say, it's 80%. You might then sell down some to the management and now own 70%. So you'll still see all the EBITA coming through because as a subsidiary, you always record the 100% figure. But you'll see a lot more of the noncontrolling interest coming out in terms of how the bottom line gets constructed for the NPAT. Moving on, just now is to say into the actual first half and reviewing that. The actual Slide 12 there, you'll see the reconciliation of our stat profit to underlying numbers. And probably the first thing to say is that we had a very significant uplift in our investment in Johns Lyng, as you would know, the share price for that has gone up. We also did do a follow-on investment in their capital raise to a pro rata to our equity stake. And of course, I've enjoyed the uplift on that as well. So we've actually removed $18.2 million after-tax profit from our actual Johns Lyng investment to derive our underlying numbers underneath. So not a bad thing to remove some numbers to get the underlying. We've also have bought, as part of Trapped Capital, some interest in associates, which then become subsidiaries. We have to step up the original valuation of that associate stake. And so we removed that profit of our Stead accounts as a nonrecurring item. And we've also removed an impairment we had in one of our agencies that was struggling with COVID just to make sure that it was fairly valued in the books. As you'll see from our overall agency portfolio, the agency as a whole has been going streamingly well. So in essence, we actually take $104.9 million of statutory profit, and we dial it down to the $76.3 million that we used for underlying earnings, which is a 26% uplift against the corresponding half of last year. Let's go to headline numbers on Slide 13. We've laid down quite significant uplift in earnings over 1H '21 with very solid double-digit increases on every bottom line metric. The revenue was up again, of course, thanks to the continuing hard insurance market, but also from acquisitions. And despite the cost pressures that were foreshadowed some time back, the margins were maintained and improved. So our cost increases were more than offset by the revenue growth, leading to those very solid uplifts as you see there. So the 19% up on the revenue, EBITA up 22.7%. Net profit after tax up 26.3%. Some of that acquisition was funded as we know from the capital raise. So the earnings per share dials down from the 26% to 20.6%, cash earnings up 25.3% and cash EPS up 19.6%. So we experienced an uptick in volumes and prices, with prices rising -- in that 5%, 7% mark that we anticipated with a couple percent volume increase on top of that. There was a little bit of return of discretionary spend, but it's probably more expected in the second half when we presumably not normalize to a more realistic level, again, assuming lockdowns have all but finished. The acquisition growth was obviously headlined by the Coverforce acquisition in August '21, very strong deal flow from the Trapped Capital. And as we mentioned, we've recently sold down some equity in our consolidated businesses to senior management. If you exclude the Coverforce acquisition, our multiples for buying insurance intermediaries was anywhere between 8x and 10x and average is around about 9x when you put it all together. The seasonality of earnings as you can tell with our forecast for the year, it's around about 46% first half, 54% second half, a little bit more biased towards second half this year as those acquisitions that we've done obviously have a bigger impact on the second half than the first half. And obviously, some of those acquisitions that we have made will now have an impact into FY '23. There's already a couple of million dollars worth of bottom line profits that we have booked into to next year from the acquisitions that we've done. We now go to Slide #14. This shows you, as we typically do, the section of our EBITA growth into our key components. So our organic growth there was a very solid 10.5%, which is above our original guidance range, hence the uplift in the guidance. The technology headwinds was a smaller 0.4%. We do expect a little bit more spend in the second half mainly as we find staff and actually get them employed. It has been a little bit delayed some of that spend. So we expect it a little bit further in the second half and the acquisition growth there of 12.6%. Now of course, as I said, a lot of that was funded through the equity raise, hence, why the NPAT is more of that 6% growth coming through the bottom line. So all those components are ahead of our expectations, upgrading guidance -- there's a couple of areas I want to note -- there's couple of areas going to be cautious on for the second half. As I said, we expect some return of discretionary spend going into the second half. For example, our convention is all systems go at the moment for March, so we can spend to do that. Technology spend, we talked about the sale of those equity interest management would come through. And we've had a very strong agency growth, which we've seen out and about to dial into. We're going to expect just a slightly more muted growth rate, it's still a strong growth rate, but not as high as the first half, which is obviously a very splendid result. We just want to be a little bit careful. We'd rather see it before we pronounce it. Let's assume a slightly dial down agency growth rate in the second half. The amount that we capitalized on our balance sheet was a touch-higher than prior years, but a large portion of that was with some of our subsidiaries actually investing into technology as we talked about with the robotics and automation, et cetera. Go down to the broking results, Slide 15. This is again -- just reminding this is where we showed 100% results as if we owned 100% of business, which we don't. And we take away things like profit shares to show that period-on-period performance. We, of course, own 100% of the network. We own roughly 64% of the pure broking businesses. So roughly 3/4 of this earnings, you see on this page comes through to the listed entity. So for the year, there was just over 8% organic growth in revenue, which as I said roughly that 8% growth in GWP. We get about 70% of that flowing through coming into our numbers, so about 5.6%. And then you dial up with volume growth and getting us back to that 8% organic growth. We did foreshadow those additional costs coming back into the business. Remember on 1 July, '20 was all about a wage freeze with the middle of COVID and what could it be. Come on July '21, we had basically 2 years of wage increases coming through. There was also a little bit of job keeper last year. And this year, for instance, people like Rob [indiscernible]. So if you took all that out, we could have shown -- instead of 3.9% growth, we could have actually shown actually even 5%. My aim was to try to make sure that we mitigated the cost increases with the premium increases. We actually achieved that in some extra. Obviously, we had the significant acquisitions in the first half -- you can see there where we've added 12.1% to the bottom line as a result of those acquisitions. This year, so far, that spend of over $500 million, it looks like this will be our largest year including our original float year of acquisitions, particularly when you look at the pipeline that Rob referred to earlier in slide deck. So some of those acquisitions will flow through next year, but that's the impact on the first half here. In fact, a lot of those businesses were purchased in November and December and then we actually gave our merger and acquisition team a break in January.

I think that's important to say, we take the team out of action, didn't we, Stephen, in January because they've been working night and day, okay and so -- but however, they're all back and they were anxious to get that. Well, I don't know whether that anxious is the correct word, but they all come back to work in the beginning of February.

So moving to Slide 16 on the agency side, we own roughly 94% of what you see on the page here and management own the other 6%. For the fourth year in a row, this is performance that is ahead of our own expectations. Really solid performance across most of the businesses. The hardening market continues to provide great opportunities to quote. So we've had further market share gains again, subject only in a few instances to some capacity constraints, but overall very, very solid result, both price and volume movements across the different agencies. So significant top line organic revenue growth of 15.8% is seen here. There were some cost increases that we processed, like brokers with the wages, et cetera, but there was margin expansion in these businesses as we -- as you see, the bottom line organic earnings growth of 20.4%. Slide 17. Our businesses, as I always say, convert their profits into cash very quickly. So we've had over 100% of our $93.6 million of NPATA converted into cash, which does reflect the typical seasonality, we have a high sales, particularly May and in June, in particular, that converts into cash in July and August. Our debt today continue to be equal or better than our historical levels. And even our premium fund collections again have also continued with our concern with arrears rate far superior to the pre-COVID levels. That's a great living set for us about how SME business is going in Australia. So we're very confident on the cash flow is continuing through. The $106 million cash flow there, you'll see if you take out the dividend that we pay the final dividend. There's still 50 -- just short of $50 million of free cash flow, and we've obviously invested that into our ongoing acquisition activities. On our balance sheet on Slide 18. Besides our acquisition activity, which we financed as we talked about mainly through the new capital, we've actually also reset our debt facilities. So we've increased our debt facilities up to $660 million, which matches, if you like, the new equity position that we have. So if we would happen to borrow all of the $660 million, we would roughly get to that 30% gearing, maximum gearing that the Board has mandated. The gearing at the moment as of 31 December is just short of that -- short of 20%, so 19.7%. We also do have an accordion facility baked into our new debt facility. So if we need to access further debt, it is there, it's no cost facility that is really for us. And as you can see, the facilities extend now all the way up to November 26. So as of today, we actually have $315 million of undrawn facilities that we can access for corporate purposes. That's partly thanks to the $15 million of oversubscriptions that we took on the retail share purchase plan. And whilst that does dilute our earnings per share growth about 1%, we thought that was the most appropriate given our pipeline of acquisitions and the right thing to do for our retail shareholders.

I think we should -- that's a very important point, isn't it, Stephen? The Board is very cognizant that we should look after the retail shareholders, and indeed, we think about that all the time.

So given the ratio circa 20%, we would expect the next ramp of acquisition opportunities to be funded by the debt facility and our free cash flow cost. And another hard point, I just wanted to raise there, given this looks like a rising interest rate environment, just -- we actually had more money on deposit, as you can see in our balance sheet there, $653 million for our subsidiaries let alone, the amount on deposit for our associates compared to the math that we actually borrow, which is in that $300 range. So if interest rates rise, we actually think we're a benefactor on that on our P&L. And I'd also note, we've actually hedged some interest rates on our debt facility, around about $200 million of them. So should interest rates rise significantly, we actually won't see a proportionate rise in our interest rate cost in our debt facilities, but we would expect to see an uplift on our earnings. So we actually think we've positively attuned to a rising interest rate environment on our P&L.

It's a natural hedge.

Yes. So I think that's probably a key summary. I hand it back to Rob.

Okay. I think we're going to questions now.

[Operator Instructions] Andrew Buncombe with Macquarie.

The first 2 that I have in relation to the guidance, can you just give us some color on how much of the guidance reflects contributions from future acquisitions or anything in the next 4 or 5 months would be all upside?

Yes. We have a small amount of acquisition growth coming into the next 6 months in of our forecast that allows us to fill up that 6% bucket. But it's certainly not all of the acquisition opportunities that Rob has highlighted on Page 5. So should some of those land into this year, then we'd have to consider how that acquisition bucket performs? Or given where we are depending on time of the year, how much of that flows into FY '23. But there's a small portion because we're obviously confident of executing on them, but we're also not that aggressive to say that every deal will cross the line or come through before 30 June, sometimes they take a while to come through.

But Andrew, if that -- if something does come through like that, then certainly, as a Board, we're very cognizant that we keep the market fully informed on that.

Excellent. Second question is again on the guidance. Can you just give us some color around what premium rate rises you're assuming behind those numbers?

Yes. We're assuming that 5% to 7% to continue through, which is in line with what we saw -- we're not seeing, at this stage, any softness on those numbers. If anything, the momentum continues to be stronger. So we're very confident on the 5% to 7% in this market should continue.

Maybe a side question on that one. A number of the major insurers have been calling out 9% to 10%. Some of your competitors have been calling out sort of the 7% to 9% range. Why do you think for your book mix, that's a few hundred basis points lower than that?

I think the insurers are optimistic, and I think they always want to make you -- people like you feel comfortable by saying that they're going to drive freely.

Maybe customers would have a different view. And then the final one for me...

Well, that's why you've got to have an insurance program. So you're going to make sure that there's sifting through the market for you and making sure that you're not burning your dollars for that -- such things, though I agree.

And then just a final one for me. As more products and insurers continue to plug into the SAP pay, when should we expect the annual investment in the technology to peak?

Look, it's a difficult question to say because as more product lines come on and as more opportunities come on, I've had some discussions in London about some propositions that might come out there. Then you have to keep investing to do that. And then your return comes in an 18 months' time after that. So I don't think you should look at the client trading platform as an end game. I think it's always something that when opportunities present and you've got the base platform there that you're going to continue to invest in it. And also at the moment, we're having a complete rejig of that platform. There's nothing wrong with the platform per se. But if you think about the genesis of that has occurred in probably 12 years ago, 13 years ago, then the ability to move data has changed dramatically over that last 13 years. If you were to build the client trading platform today, you wouldn't build it on the same basis that we built in the past. So we're unpicking, it's not the sins of the past, but what the status quo that existed 13 years ago does not represent the status quo today. So you have to continue to invest in it.

Your next question comes from Kieren Chidgey with Jarden.

Rob, Stephen, couple of questions. Maybe just starting on the number of brokers sort of through the network. It does look like there was quite a large number of mergers through last half, I think, close to 30. So just interested on sort of what's going on there, what's driving that and potential implications down the track? I mean if those nonequity brokers are extracting more efficiency, what implications that has as to sort of, I guess, acquisition costs going forward?

Well, let me say that acquisition costs are not going backwards, okay. And candidly, I would hate to be Robert Kelly circa 2022 considering whether he'd like to go into and convert a network into a listed company, and then go and try and raise capital and say, you know what, we're going to have to pay between 10x and 12x EBITA. It was hard enough to convince the investment income by paying 7.5x EBITA back in 2012 and then floating in certainly. So it isn't going backwards. We are fortunate that we have had a successful -- we have made a successful company, and we're producing really good results and good profits for our investors. So we're in a much different position today as we head towards the end of financial year '22 to be able to pay more than what we paid for in those early days the game started. And I'd just reflect on sort of how much Porsche cost in 2013, okay? And you could get a really good Porsche for about $180,000. Now, if you want the same car it's $380,000. So if you want to buy a quality car, you have to pay a lot more for it today than what you would have had to pay for in 2013. Conversely, if you want to get quality businesses, you have to pay top dollar for them now. And remember, our motto [indiscernible] has always been to buy quality businesses, pay full value for them and get earnings per share growth straightaway.

Okay. And the drivers of that sort of merger activity in that nonequity channel? I mean can you just give us a little bit of color around what's occurring?

Well, I think it falls into a couple of areas, really age and the ability not to have succession can be one of the factors that somebody goes will hang on, is it time to take -- and I guess a testament to that is really our Trapped Capital Project where we went -- we simply said to people is it time to release some of the capital that you've built up in this business. So I think -- and if you -- I think if you were to run Trapped Capital 5 or 6 years ago, it wouldn't have been as successful as it is today. And candidly, people are working longer now, the people are not retiring at the traditional retirement age. Now that seems to have gone out the window completely. But some people are going, what if I am going to work on -- past my 65th birthday, maybe it's a good idea to take some of the capital out of this business and use it and still keep building the business. So I think age, succession, the difficulty of compliance, okay? Let somebody else have the responsibility for that. The intricacies of legislation of how it's changing, there's a lot of -- now if you become a part of an equity broker, then a lot of that responsibility is completely taken away from you because we roll out all of these factors and give you the ability to have another shift to come to talk to develop internally how you want to resolve these things. So I think that's a few factors. And also, I think -- if you go back 2 decades ago, you could buy insurance brokers for between 1.25x and 1.5x commission and fee income, okay? The viability of an insurance broking business and of course, an underwriting agency business or MGA has shown sustainability over a long period of time -- and a bit like in some ways, rent rolls in real estate agencies, people are going, you know what, these are annuity businesses almost. They're really good to get in. The cash flow is reliable. So that's -- that's made them desirable. And once you get the supply and demand in a desirable sector, then you're going to get the cost push inflation by prices going up. Just by people be seeing more value than on buying these businesses than somebody else does.

And just to add to that, don't forget, as you said, part of Trapped Capital is, we -- some of the acquisitions we've done directly, some we've also done through our existing businesses. So we put 1 or 2 businesses together with other ones. And we've also had a couple of our brokers together as well. So some of that -- a subset of that number is what we have ourselves done to bring businesses together.

Yes, I'll -- for instance -- I'll give you -- I'm in negotiations with somebody at the moment. It's part of Trapped Capital. And the reality is it's a sensationally good business. The guy is in his 60s, but doesn't want to stop working, but is sick to death of running his back office. And he's got to start of 25. He is sick to death of his HR. So what he'd like to do would be to get -- to sell a great portion of the business, take his capital out of that business and then continue to work without the incumbencies of all HR, computers, back office and audit. And we take all that away, seamlessly. So it's a different paradigm to what it was.

Okay. And just quickly on the timing around the deals you completed in the half just gone. I think at the AGM from memory, you said about $4 million of completed EBITA and now it's sort of closer to 11%. So presumably, that was done very late in the half, so we've still got half a year contribution of that will come into the '23 year? Is that the way to think about it?

Yes, that's right. So I think we closed our 5 or 6 deals in November and about the same number in December. So yes, we worked -- as I said, the M&A team worked extremely hard to get all those deals away.

We also increased the M&A plan. We have a really good program for bringing graduate through Steadfast. We've roughly got about 12 or 13 graduates working in this business that we've brought in over the last few years and some talent out of that graduate program went into our M&A division. And candidly, their expertise, their regression, their skill has helped dramatically in that area.

Yes, it has. And normally, we'd say we'd do, on average, about 1 transaction a fortnight. If you look at the numbers we put forward for this half year, we've actually done more than 1 transaction a week. It's been very, very busy out here.

And maybe just a final question on Coverforce, Rob, I think you mentioned in your opening remarks, it's traveling well. I just wanted to check a couple of numbers because of the FY '21 result, I think sort of the implied metrics and value you paid for the business suggest that you're expecting around $33 million of -- I think it was actually EBITA. So a little bit inconsistent with the $10 million EBITA contribution you've shown your Stead accounts for Coverforce coming through first half '22? So it seems to be tracking a little bit behind that FY '21 -- behind FY '22. Is that just pure seasonality around sort of obviously a stronger April renewal, June quarter renewal?

There is some seasonality, but I also say that the accounting for Coverforce is quite intricate. Some of it flows through to the associate line, some of it flows through all the -- overall revenue expenses, et cetera. So I think the best thing to summarize it, to put aside all the accounting anomalies is to say that it's absolutely tracking in accordance with the EBITA that we bought that we had pronounced on the day 1. We're just tracking absolutely to that budget.

Your next question comes from the line of Siddharth Parameswaran with JPMorgan.

A couple of questions, if I can. First one, just on the operating leverage that was evident in the underwriting agency business and which didn't seem to come through in the broking business. As in the revenues -- sorry, the EBITA grew quicker than the revenues in the agencies, but it went the other way in the broking business. So I was just wondering if you could just provide some color on exactly why that was? I mean I think, Stephen, you mentioned that both businesses have a step-up in expenses, salaries and lack of job keeper. But -- is there anything else we should think about in terms of profit commission or anything else which you might have boosted those numbers? And is that uplift sustainable?

Sure. So the actual numbers we present there are we strip our profit shares because that can come and go. So we -- it's got nothing to do with profit shares. What it relates to, in particular, is that the volume growth in our agencies was superior to our brokers now. Brokers actually performed actually better than what I was expecting, but the agency has performed way better than I expected. So because -- and that volume growth for the agencies generally speaking gets absorbed by the existing cost base. So you're not necessarily buying a lot more staff. We've obviously spent a bit of time also on automating processes there to be able to absorb that extra -- a new business into the system. So generally speaking, both of them had to cope with the wage rises, but the actual volume was able to be leveraged through the agencies quite nicely. I repeat that for 4 years, they've actually outperformed our expectations every single half year, but I'm still not prepared to say that they'll outperform our expectation in the second half. I'd rather see it and then report it to see if that comes through in the second half.

Yes, if you go back to what I said 3 years ago, I said, look, we've had a stellar first half. But candidly, I don't know how long this can continue. And I was wrong, the decision continued. So we have to really be conservative about being convinced, it's going to continue. In other words, we keep going to another summit every time and getting there. Stephen and I are always conservative about whether we're on the platform. Yes. By the way, Sid you sound really sprightly. Did your daughter sleep well last night, did she?

Yes. No, she is in a different room to me, Rob. So I've had a good sleep. Thank you. I had a second question just on the growth that we're actually getting. I was hoping if you could just provide us comfort on or maybe some color actually around where the growth is in the underwriting agencies. So which underwriting agencies are actually providing this growth? And the related question around that is just around Strata and whether is there any risk at all from some of the risk -- sorry, some of the potential reviews into that market?

Yes. Look, it's a good question, Sid, but let me tell you that the 2 of these 27 agencies didn't do well, but 25 of the underwriting agencies absolutely showed us the lights. Like, Dawes, for instance, just taking that, which is the specialist collector car and prestige car underwriting agencies. When we bought that, it was doing $12 million GWT. It did over $41 million last year. It's an outstanding business. Miramar topped out over $100 million now. The -- these are well-established businesses, established with the brokers servicing the area. So they're growing and growing. So across the range, as I say, sports underwriting suffered greatly from COVID, okay. And QUS which is the smaller underwriting agency for STRATA, AIG, who has the capacity behind that, people want to continue driving that sort of business. Now over 70% of that business is -- is what considered retail strata business, and it's not easy to get it placed. So we're struggling to get the capacity providing that. So they're the 2 low lights in our underwriting agency. But as you can see, they were not impactful on the overall result of the underwriting agencies. To your point on Strata, it's crucially important that we have a big responsibility there because we have some of the best strata brokers in Australia, and we certainly have 2 of the best underwriting agencies with Axis and with CHU, well-established long capacity providers and market leaders in the sectors that they've got. So yes, we're cognizant that the rem structure in underwriting agencies possibly could come under review. In fact, we have commissioned John Trowbridge to do an independent review of remuneration in the strata industry and the impact on the consumer and the way the players -- and there are a few players in it. You've got the managing agents, you've got the brokers and you've got the consumer, It's the strata itself, how they interact, what services they provide and how they get remunerated. So I'm hopeful that, that review will be completed certainly over the next 5 or 6 weeks. And when it is, it will be a public domain information that we put out. So I think we've assumed some responsibility in that area in cohort with the managing agents and brokers both within Steadfast and without Steadfast and a range of strata managers to have a look at that whole section. And I guess that's probably a self-regulation at the utmost point. So we'll keep you informed on that.

Okay. So just to be clear, you're not expecting any meaningful change in terms of impact on your business...

No, no. But I'm also I'm also cognizant that this area is an ever-increasing area. Stratas are going up everywhere, multiple buildings. And that sometimes, there's erroneous information given out about the pricing mechanisms and erroneous information is given out about how it's treated in various jurisdictions. And our reinsurance divisions work strongly with the people in North Queensland to bring some sense and sensibility up there. And indeed, the impact of certain parts of Australia, and more particularly the Eastern Coast and in sometimes highlighted in Far North Queensland, the impact of climate change in terms of weather events is making it very difficult to actually make profits in some areas. So I don't think -- why we are doing this review of the remuneration is to actually be ahead of the game and to make sure that if we ever come under review that we've canvassed the position with all the players in it. And we have -- hopefully, we will have an agreed point of view that, that would be sustainable in the market and then it's looked at by anybody would say that is a very salable way to go about doing your business.

Okay. Just a very -- last -- very quick question. Just about the outlook for M&A from here. I mean you mentioned that FY '22 is obviously a very strong year. I think it was likely to be the best year that you've had in terms of the amount spent. But just from here, I mean, should we view this as an outlier? Or -- is this effort to get more and more deals done likely to continue and perhaps more expansion overseas. Maybe if you could just comment on how you're looking at FY '22 versus the outlook from here?

Look, with what we've got on our plate and the rest of our network there's still over $120 million worth of EBITA in the rest of our network.

Yes. We're probably approaching, but not yet 40% of the network that we might have an equity staking which is still 60% that we don't...

Still 60%. So in our own backyard we've still got a huge amount of potential to go forward with. Now in saying that have we reached a saturation point in the Australian market? No, no, not at all. We haven't. But -- if you remember, we took equity -- we've been in London. We've had a London operation for several years on the ground. And if you think about, we took the equity, the minor equity position in unison and found the same units as Steadfast. And then we took -- we uplifted to 60%. And now we are not just an investor in that business, but we are operationally involved in working with that business. And not restructuring it so much as redirecting it in terms of what it does for its -- I mean, it's heading towards a $40 billion GWP that goes through unisonSteadfast, U.S.

U.S.?

U.S. So if you think about that and you think about our involvement over several years with them, and you think about the lack of work we've done with them due to COVID. This is an exciting time for us. Two of them, as I said before, two of them, most senior people here have both been -- will have been there for 2 weeks working. So now we are redirecting the efforts of the CEO to actually be out on the ground doing what made him a successful in building this business -- in the business -- in the first place, and now we're helping them on their marketing. We're helping them on their back office. We're helping them on their risk services. So it's -- we have -- we are doing business with 260 brokers all around the world. Now we've got our skill to convert that platform of brokers into a whole lot of things that Steadfast has achieved in Australia, New Zealand and Asia. So yes, it's exciting times for us. And so we, many years ago, thought that we needed to have a footprint in the world market, and we've got that by unisonSteadfast.

Your next question comes from Naveen Patney with E&P.

Just a follow-up question from the previous question. You mentioned that there's a long way to go in your own backyard, so $120 million of EBITA to go is interesting. If you could provide some distinction between how much of that $120 million is already Steadfast equity-owned to some extent versus just being network?

No, that's all loan equity.

Loan equity. Okay, okay. Cool. Okay. And is it fair to assume over the next couple of years that the lion's share of your M&A will be continuation of the Trapped Capital just given the size of the opportunities rather than some of the larger deals that we've been accustomed to seeing over the last few years?

Look, I think it's fair to say that that's true, okay? But that doesn't mean that we wouldn't be geared up to do a major acquisition if we had to do.

There are no further questions at this time. I'll now hand back to Mr. Kelly for closing remarks.

Okay. Thank you, Jack. Look, thanks, everybody. It's gone a little bit over time to what we do. But I have 2 things we've done. We've informed you about where we're at -- we've given you an honest and truthful update of the status of the business. We've engaged with you on Trapped Capital. So you know exactly where we're going and what we're trying to achieve it. And on behalf of the team here, I can assure you we will continue to drive the success of this business as we have done since August 2013. So thank you for your time. Look out the windows in Sydney, but -- and it looks like we should be building an arc because of the amount of the water that's falling. All I can say is that as an insurance professional, I look at that and go claims and claims makes extra premium. And so extra premium means revenue. And so thank you very much for your time.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.