Brightside Group - Insuring Growth

http://www.brightsidegroup.co.uk/

 
Brightside Group (LSE:BRT) was founded in 2001 and listed on the Alternative Investment Market in 2007. The group is a specialist insurance broker that has experienced good growth in recent years and looks an interesting proposition. Brightside quickly surpassed 100p soon after its IPO, but fell back, making an all-time low of 15.75p earlier this year, but has recovered well to a current share price of 21.75p/share. Brightside has a current market capitalisation of £100m and the group has 456m shares in issue.

As represented above, Brightside has entered a long-term uptrend following making all-time lows. Assuming that there is a bounce off of the lower support channel line, an initial target could be up to 26p/share with this increasing as time progresses. Thus chart-wise, Brightside looks poised for further gains despite the intermediate term downtrend it currently finds itself in. With the share price reaching as high as 40p in 2011 following making (what was then) an all-time low at around 17p, it is clear that upside potential exists. In addition, it would be fair to view Brightside as a safety play. It is quite illiquid and would probably fare better than most in a challenging economic environment.

Brightside has an extensive portfolio of both insurance businesses and services. The insurance brands are currently quite low status in terms of consumer awareness, but they are gathering strength quickly with some catering for tens of thousands of customers. Aside from this, the group has a Premium Finance division that deals with processing loans. "Brightside is a distributor of insurance products and ancillary services which, importantly, do not carry underwriting risk. The Brightside strategy is to partner with underwriters, providing those underwriters with a reliable source of quality business where the clients' risk details have been verified to ensure their completeness and accuracy. This provides an exceptional route to market for underwriters which supports their loss ratios and therefore reinforces Brightside as a broker of choice when allocating their insurance capital." The firm also places a large emphasis on providing good customer service to compliment the policies - a feature that if often lacking in many of the larger insurers. Brightside employs over 1100 staff across the UK. The insurance brands are as follows:

- eInsurance Group (Provides a range of transport, home and general insurance policies)
- Commercial Vehicle Direct (Specialist van insurer)
- ONE Business (Provides a range of transport, home, office and courier insurance)
- Motor and Home Direct (Car and Home insurer)
- Quota Marketing (Fastest growing GAP insurer for cars, vans, homes, businesses and taxis)
- YouChoose Insurance (Insurance for cars, vans, bikes and homes)
- ONE Bike (Bike insurance for all types)

"Brightside Group plc includes five service businesses, complementary to our insurance broking activities in that each provides a solution for a different aspect of the insurance product life cycle. "
These five businesses are Quota Marketing (in another division), Panacea Finance, InjuryQED, Quote Exchange and DebtHelp. Important to the risk profile of the business, Brightside avoids high-risk underwriting services and focuses upon ancillary services and insurance distribution. Many firms in the car insurance industry have benefit from soaring revenues as prices have increased in recent years, and while this may now be ending, the potential for emerging business remains strong as more customers may be priced back into the market.

The main financial report for the year came through results for H1 2012 which were very strong. In particular the cash flow of the group strengthened and Brightside re-instated an interim dividend amounting to 0.22p/share. In past years, this has not been prevalent due to the use of retained profit to fund acquisitions and further organic internal growth hence the return to issuing dividends should be seen as a significant milestone for shareholders and perhaps a hint that strong growth is likely to still be forthcoming. EPS growth rose to 27% in 2011 and this is expected to continue through EPS growth of a further ~23-25% for 2012.

In addition to this, organic growth maintained its pace. Revenue increased by 10% to £43.6m, pre-tax profit increased 14% to £8.2m and basic EPS rose 13% to 1.25p/share. In terms of the balance sheet, total equity rose 16% to £74m, operating cash flows up to £11.1m and a very significant £15m in outstanding debt during the period. In essence the group managed to increase sales, reduce debt, and improve the balance sheet which is all good news for shareholders. In many cases, it is often the more 'boring' illiquid companies that offer stable and solid growth. In addition, Brightside was listed as being within the top 20 UK brokers which validates the group's progress.
courtesy of jmv on flickr

"The Board views the prospects for the remainder of 2012 and beyond with confidence. Our long term aim is to build an outstanding major insurance distribution business. The strong performance in the first half is another important step in this direction".

Furthermore, in relation to the dividend policy, Brightside expects to be able to follow a 'progressive and sustainable dividend policy'. Perhaps the most significant achievement for the group was the signing of agreements with both ASDA money and Debenhams to provide insurance products. Whilst the true effects of this will only be seen in 2013 onwards, the strong potential was demonstrated with over 2300 policy sales in the months of July and August 2012 alone. Across Brightside's businesses, total annual policies increased by ~5000 to ~194,000, which each sub-market insurance sector seeing an increased number of policies except the van insurance section which declined in policy number by 6%. However, monthly and miscellaneous policies did experience quite sharp downturns, thus the total decline in policies totalled 5%. Despite this, Brightside's forward strategy was to target their core business areas (which saw 3% growth), so the decline elsewhere is not particularly surprising and any recovery in these may give additional upside potential. The Premium Finance division saw good growth with an additional £14m of finance to £81m and an increase of 21000 loans processed to 130,000. Quote Exchange experienced steady growth whilst personal injuries business InjuryQED has seen constant growth. However there is a worry for the IQED business:

The Government has recently announced its intention to ban the payment of referral fees and introducer commissions in connection with personal injury claims. This ban, which is expected to be introduced in April 2013, will encompass the services provided by our medical reporting agency IQED. Such changes in legislation inevitably lead to uncertainty as the industry seeks to understand the impact of the relevant changes.  Therefore we are working with both existing referrers and potential new referrers of business to develop a business model which will secure our flow of medical reporting referrals post any referral fee ban and at this stage we do not anticipate any reduction in medical reporting referrals as a result of the referral fee ban.

At 30 June total group assets stood at £144m with debt reduced from £29.5m to £14.5m - the resumption of the group being debt-free in the next couple of years should help to reclaim investor confidence also. Perhaps slightly unnerving is that the 'free' cash balance only stands at £2.9m - this might not be a problem though if they can free up the £5.3m currently in client cash and continue to be cash generative. In regards to future cash surpluses, the below is very good news for shareholders and is proof that the board of directors is focused upon creating shareholder value.



courtesy of micora on flickr
It has become clear that the share price of the Group is disproportionately affected by low volumes of shares traded on the AIM market. An illustration of this is that in the six month period 20 July 2011 to 20 January 2012 the share price moved from 27.00 pence per share to 13.73 pence per share, a movement of -49% on shares traded representing only 3.2% of the total shares in issue. This arises from the adverse effect of sales of small numbers of shares over time. At the same time the marketing of the shares to institutions and other investors is often frustrated by the lack of availability of stock in the market.
 
The Board believes that within appropriate limits and under the supervision of its Nomad, the Group should purchase small amounts of ordinary shares. Such ordinary shares would be held by the Company in its own name and would in the future either be sold for cash, used to meet the Company's obligations under employee share schemes or be cancelled at a later date.
 
Another interesting case with the company is that former CEO Arron Banks left the company after reportedly wanting to take it private. With this opposed the current CEO Martyn Holman has taken positively with a smooth transfer. Elsewhere in the operations, Brightside recently announced (August) that it will provide ~50 new jobs in Wales in a development backed by the Welsh Government (who would provide a business finance package of £499k).

The ASDA and Debenhams car insurance agreements (through the eCar business) should help Brightside further expand its distribution and build brand strength as seen in July and August. Whilst it is still too early to examine the long-term effects, the initial response has been encouraging. Finncap and Evolution Securities currently have buy ratings (or equivalent) on the stock with target prices of 28p and 41p respectively.
 
Ultimately, the strong financial position of the company combined with a low P/E ratio (less than 10x growth) and the commitment of the directors to enhance shareholder value should lead to an improved future share price. What Brightside won't give shareholders is a lot of excitement and a rapid share price increase, but what the company does offer is a good growth, undervalued, safety play with upside potential over the medium-term.

An external video on Brightside is shown below:

UPDATE 31st July 2013: Following the release of a Trading Update this morning, I have moved Brightside Group from buy to neutral at 27.50p equating to a 26.4% gain through price appreciation. On the Review Results page, 27.78p is shown to account for a 0.28p dividend

7 comments:

  1. Interesting company. May see how it trades this week

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  2. These reviews are great ,subbed

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  3. I am liking this company as I already hold it and am waiting for 30p+

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  4. As per your chart bottom of channel reached this morning. Looks good for move up now

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  5. Good clear review as usual

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  6. Takeover talk with 27p price indicated yday! What a joke of an offer! your thoughts el1te?

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    1. An opportunistic idea that undervalues the company. Realistically 30p+ should be paid

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