Come rain or shine
Innovation Group's (TIG.LSE) acquisition of LAS extends the company’s offering into the ‘wet’ perils market and gives it a platform to accelerate the internationalisation of its property BPS offering. With the balance sheet also strengthened by placing, the company now has more firepower to make further earnings-enhancing deals. The rating looks fair, but given the scope for organic and inorganic EPS expansion, we still see good potential for the shares to continue appreciating.
LAS provides a new growth vector
The acquisition of LAS for £35m gives Innovation a position in the UK ‘wet’ perils market, expanding the UK property division's addressable market from a claims spend of £100m to £1.3bn. While the multiple (10x run-rate EBITDA) is above the company’s usual threshold, the scope to generate synergies, through applying the fixed repair cost business model used so successfully by the UK subsidence business and exporting the business into its other geographies, looks very good.
Reference sites, new management to boost software
Growth prospects for the group’s software business should be boosted by the first US reference sites on the re-architected Insurer V7.2 going live during the spring/summer this year. The arrival of Paul Nichols, previously CEO of Kewill, to head up the software operations, signals management’s ambition to grow the business into the significant opportunity ahead of it.
Financials: Margin expansion trajectory can continue
At the EPS level, the positive impact of the Crash-worth and LAS deals is offset by the dilution from the placing and the strengthening currency headwind, meaning that our 2014 and 2015 EPS are reduced by 5% and 2% respectively. However, with c £25m of change left over from the placing, the company has plenty of firepower to make further earnings-enhancing deals. With good progress in software and the potential to expand BPS margins both organically and through acquisition, we now see scope for operating margins to expand into the high teens over time, opening up the prospect of sustained double-digit EPS growth.
Valuation: EPS upside potential not in price
With a 2015 P/E of 18.2x, Innovation’s rating looks fair on our current estimates, being similar to the company’s broader peer group. However, we still see good scope for share price appreciation, through both the potential for margins to expand beyond our forecast level and the deployment capital in earnings-enhancing M&A.
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