Morningstar’s verdict on 2 Insignia acquisition bids
In light of two acquisition bids in recent weeks, Morningstar believes Insignia is undervalued.
At the end of 2024, Bain Capital made an offer for $4 per share to acquire 100 per cent of the company which was rejected by the Insignia board as it felt it was not fair value for shareholders.
“The Insignia Financial board believes, based on its view of the fundamental value of Insignia Financial, the proposed transaction does not adequately represent fair value for shareholders in the context of a change in control transaction and that is not in the best interest of Insignia shareholder to engage with Bain Capital in relation to the indicative proposal.”
On 3 January, rival firm CC Capital made a higher offer of $4.30 per share; the board is yet to respond on this offer. The bid from CC Capital is 7.5 per cent higher than the initial Bain Capital offer and around 40 per cent higher than Insignia’s share price in early December.
Shares in Insignia are up by 63 per cent over the past year and by 32 per cent in the past month following the two bids to trade at $4.10. However, over the longer term, it is down by 46 per cent over the last five years.
Equity analyst Shaun Ler said the two bids demonstrate Insignia is undervalued, particularly in light of future plans announced at the firm’s Investor Strategy Day last year.
Ler said: “The proposal vindicates our view that Insignia was undervalued, and that its earnings outlook is brighter versus its 2023–24 levels. The firm is recovering from past headwinds that hurt its ability to attract and retain client assets and improve profitability. These include the Hayne royal commission in 2018 and sharp rate rises of 2022–23.
“Margin expansion prospects are improving, driven by restructuring initiatives such as migrating client funds to more efficient platforms, reducing nonessential costs, and an expected recovery in fund flows from cyclical lows.”
Fair value for the firm’s shares, it said, would be $3.95 regardless of whether it remained standalone or was acquired compared to $1.35 for AMP, which is currently trading at $1.64.
The firm’s five-year plans include changes to cut cost, increase scale and increase client numbers and revenue per adviser by 2030.
It currently has 110 advisers at Shadforth and 90 at Bridges, having divested self-employed advisers at RI Advice and Consultum ones into Rhombus Advisory in July. During FY24, the advice division achieved $150 million in revenue and has $23 billion in funds under advice across 18,000 client families.
Regarding clients per adviser, Insignia’s salaried advisers currently service 100 clients each and there is an opportunity to increase this to 115–125 by FY28 and as high as 140 by FY30, a 40 per cent increase in client numbers.
Moving onto revenue per adviser, advisers currently report $0.8 million in revenue per adviser and the licensee expects this to increase to $1–1.1 million in FY28 and to $1.1–1.3 million in FY30, a 62 per cent increase.
This revenue increase will be driven by accelerated organic growth via referrals, marketing and new propositions rather than enacting inorganic growth and acquisitions that it might have done in the past. It also wants to grow the number of advisers and reprice its advice book.
Ler said: “Insignia’s board is reviewing the proposal to decide on engaging with CC Capital or not, likely weighing up the upside from stronger earnings against execution and market-related risks. On the one hand, Insignia’s earnings momentum is improving, marked by ongoing cost reductions and recovering product flows. On the other, the firm faces several execution risks.
“These execution risks include required transformation investments, a potential increase in remediation payments, and competitive pressures from faster-growing platforms like Netwealth and HUB24.”
AUTHOR
Laura Dew
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