CIBCThis is a flash report so there's potential for them to raise their current target of $39.50. GLTA
EQUITY RESEARCH
June 13, 2023 Flash Research
DEFINITY FINANCIAL CORP.
Drayden Transaction Is Strategically Positive
Our Take: Positive. The transaction is earnings-accretive, expands Definity’s
earnings diversification and demonstrates execution against management’s
acquisition strategy. Implications: We see four broad implications related to the transaction:
1. Financially accretive. The transaction is expected to close in the
third quarter of 2023, and we estimate EPS accretion of 1% to our
2023 EPS estimates, and 3% accretion to 2024 estimates. We
estimate Definity is paying 15x for the additional earnings it expects
to generate.
2. Diversifying sources of income. Increased diversification with an
ever greater proportion of operating income coming from distribution
income is positive. The transaction is expected to increase
distribution income by 25%, with distribution income from Q1/23
coming in at $8.9MM. Distribution tends to be less volatile than
underwriting income and is capital-light. Organic growth from
distribution income is ROE-accretive and a good source of cash flow
for funding shareholder dividends.
3. Utilizing excess capital. The acquisition will be funded through the
use of excess capital and debt. As of Q1, DFY had $554MM of
excess capital, implying that the Drayden transaction should utilize
roughly one-third, assuming conservative debt usage. The company
maintains a strong capital position with ample capacity remaining for
further acquisitions (~$350MM of excess capital plus ~$275MM of
debt capacity).
4. Investing for growth. Drayden is a leading insurance broker in
Alberta, taking in roughly $125MM in annual premiums. The
expansion adds scale to Definity’s growing distribution franchise,
expanding its network outside of Ontario. The transaction gives
Definity yet another avenue to grow its business while leveraging the
company’s existing network.
Details: DFY announced it has completed a transaction to acquire Drayden
Insurance for $208MM through a combination of excess capital and debt.
Drayden is an insurance broker focused in Alberta with an annual premium
base of roughly $125MM. Through the transaction, DFY expects to increase
its distribution income roughly 25%, which we estimate will add ~$12MM to
2024 earnings (+3% to 2024 EPS estimates). Drayden employs over 170
people across eight locations in the Edmonton area. Following the
transaction, Definity’s McDougall business will have over $860MM in annual
premiums with 860 employees spread over 65 locations. The transaction is
expected to close in the third quarter of 2023.