Impressive FY19 results met expectations via a combination of record Legacy deals and growth in the scale, product range and geographical reach of Program Management income. The latter is key, as this builds a base for future growth in complementary, visible, and reproducible fee-based revenues and commissions.
Group revenues are defensive, so R&Q takes a pragmatic view regarding the short-term impact of economic turmoil on its business. It sees some potential for Covid-19 delays in securing both legacy deals and new programs this year but, conversely, for insurance industry disruption to drive business in its direction.
R&Q looks well set, based on business booked in FY19 and Q1 2020 and underlying growth in program activity. Premium and commission income is fully visible 12-18 months after business is booked and, as it builds, is likely to reduce the proportion related to legacy income. The latter is deal-based, so difficult to predict, but potentially highly profitable.
Record performance is a direct result of the strategic refocus, now into its third year, on two complementary, high growth specialty insurance activities: legacy purchases and program management. That has created a prospective mix of capital growth (in Legacy division) and steady, visible fee income (Program Management).
The group's valuation is best judged as a sum of the parts, since the two divisions have distinct revenue models and earnings profiles. Our analysis (see note) suggests a material undervaluation vs R&Q’s projected growth and internal targets.
Indeed, simply rerating to sector levels indicates in the region of a 66% undervaluation at present. Underpinned by a historic NAV / share of 148p that is only slightly below the current share price despite the clear growth opportunities, and with a record of attractive shareholder distributions.
