Record first half, momentum building

The recent interims confirmed that Covid-19 was minimally disruptive operationally in H1 20 and, ironically, may have improved both of R&Q’s divisions’ medium-term trading outlooks. As the pandemic and other industry events have generated significant losses for insurers, they have created the current ‘hardening’ market driving demand for Legacy and Program Management.

The group reported a 30% increase in interim pre-tax operating profit to £10.4m. Economic commissions revenue was 88% up y‑o‑y at US$10.7m and there was a US$0.8m economic EBITDA gain (H119: US$0.3m loss). Legacy achieved a 17% operating return on tangible capital of (H119: 14.1%), 23.3% on tangible equity of 23.3% (H119: 16.4%), both well above 15% internal targets.

Portfolio Management reported 95% higher contracted premium to US$925m at the period end; it added ten active programs and now has 36 in total. Legacy services completed nine transactions across seven jurisdictions, acquired net reserves were 81% up at £267m.

R&Q has hit all key defined growth targets over the last two years and powered through pandemic-related economic and industry disruption. It reported record six-month divisional performance and, in both cases, new business pipelines, competitive positioning and the benefits of a ‘hard’ insurance market underpin potential to build high quality and increasingly visible revenues and grow margins in the next few years.

Underpinned by a rapid growth outlook, we regard the shares as materially undervalued standing at 11.2x FY20e EPS, with a 6.1% prospective yield, and at a steep discount to listed peers.