(Newswire.net — April 11, 2020) —
BRP Group (NASDAQ:BRP) launched an IPO this week which debuted to a strong start. As StreetInsider reported, the insurance company’s IPO opened for trading at $17.38, up 24% from its initial IPO price of $14. While the value did decline on its first day of trading and finished at $16.37 at the time of writing, BRP Group currently has a market cap of over $975 million. Major underwriters for this IPO include JP Morgan (NYSE:JPM) and Bank of America (NYSE:BAC).
BRP Group wants to position itself as a rapidly growing insurance company with solid financials, and just the sort of company those more skeptical of IPOs may turn to. But some of its numbers are not as good as they might appear, and the company is overvalued compared to its peers.
How Big Can It Get?
BRP, which stands for Baldwin Risk Partners, provides a wide range of insurance and risk management to businesses and customers. In its S-1/A report, BRP states that “We represent over 400,000 clients across the United States and internationally,” with more than 500 employees.
BRP has four main operating groups called Middle Market, Main Street, Medicare, and Specialty, with each group specializing in different facets of risks management and insurance, including property insurance that covers kitchen cabinet refinishing. Middle Market, which according to BRP “provides expertly-designed private risk management, commercial risk management and employee benefits solutions” is the largest section as it made up 46% of 2019 first half revenue. All four sections contribute at least 10%.
The U.S. insurance industry has performed well over the past few years, with companies like AIG (NYSE:AIG) and Allstate haven seen their share prices risen by over 10% over the past 12 months. However, there are challenges on the horizon. Deloitte lists challenges such as an economic slowdown and ongoing disputes over tariffs trade, and there is also the threat of additional governmental regulation. And the insurance industry is highly mature, with Ibis stating that the finance and insurance industry is set to grow by only 1.8% in 2019.
Consequently, BRP is attempting to distinguish itself from larger competitors with its high growth rate. According to its SEC report, BRP’s 2019 first half was $62 million, a 55% increase from $40 million in the 2018 first half.
However, the first problem with BRP is that this number is somewhat deceptive. BRP has been on a major acquisition binge over the past two years. The company acquired assets and liabilities of T&C Insurance in 2018 for a total including cash and assets of $17.3 million. This was followed by a 2019 $37 million purchase of Lykes and an over $100 million purchase of MSI. BRP uses a metric called consolidated Organic Revenue Growth to admit that its non-acquisition businesses grew by just 18 percent in 2018 and 17% in 2017.
Strong Finances, but Overvalued
BRP could point out that a revenue growth of 17% is still quite good for an insurance industry which grew by 1.8%, and the company can point to other additional good financial numbers. BRP is profitable, recording a net income of $6.7 million in the 2019 1H and $2.7 million in 2018. Operating margins improved from 11.9% in 2018 to nearly 20%, and the company’s cash flow has remained consistently positive. But as should be expected for a company which has been on major acquisition binge, BRP is heavily in debt with $268 million in total liabilities. The company will use some of the net IPO proceeds to pay down said debt, particularly $77 million in borrowing from the Villages Credit Agreement.
And then there is the matter of BRP’s valuation. BRP sold 16.4 million Class A shares in this IPO, and those are all the shares available to the public. There are a total of 59 million shares, or to be more accurate LLC units which will be held by pre-IPO LLC members such as co-founder Lowry Baldwin. This creates a market cap of over $975 million. Combine that with $268 million in total liabilities and $12 million cash, and we are looking at an enterprise value of $1.23 billion.
Given BRP’s 2019 1H revenue was $62 million, we can assume for now that the company would have a revenue of $124 million for all of 2019. BRP’s 2018 revenue was double that of its 2018 1H revenue. The result is an EV/revenue ratio of 9.9.
That evaluation is extremely high. BRP lists AON (NYSE:AON), Brown & Brown (NYSE:BRO), and Arthur Gallagher Co. (NYSE:AGH) as peer competitors, and those companies have valuations from 3 to 5. If BRP was organically growing by 50%, that might be enough to give the company a second look at such a higher valuation. But the company is not, and its acquisition binge does come with the downside of high debt which elevates its enterprise value.
BRP is growing, and it has the potential to be a good investment at the right price. Investors should give the company a second look once the lock-up period ends as the price may fall then. The company could be a decent investment closer to $11 or $12.