Have a $55.00 target. GLTA
TRISURA GROUP LTD.
Topping Up Capital With An Equity Raise
Our Conclusion
We are resuming coverage of Trisura Group following a period of research
restriction related to the $53 million equity raise. The equity offering provides
better flexibility to manage growth with minimal EPS dilution and is ~6%
accretive to BVPS. We suspect that a few factors contributed to the decision
to access the capital markets, including: 1) the desire to scale more rapidly in
U.S. Surety (particularly following the recently announced acquisition), and
2) the generally resilient growth trajectory.
Key Points
Trisura completes an equity raise. Trisura announced that it has
completed a $53 million public offering of common shares at a price of
$32.90/sh. The stated use of proceeds is to support growth of the platform on
both sides of the border and to proactively capitalize the U.S. Surety entity.
Better flexibility to manage growth. In addition to proceeds from the equity
issuance, Trisura also has access to ~$35 million of liquid securities at the
group level (some of which could be pushed down to the operating
subsidiaries) and ~$70 million of debt capacity below the 20% debt-to-capital
target (on a pro forma basis post equity raise). For illustrative purposes, if
Trisura were to downstream all of this capital to the U.S. operating
subsidiary, we estimate that the underwriting leverage (i.e., premiums to
capital ratio) would decrease from 7.2x to 4.8x. This is an oversimplification
as we suspect that the capital will be spread across the organization more
broadly (e.g., capitalizing the U.S. Surety entity), but this may help frame the
scale of capital available internally following the equity raise.
Modestly dilutive to EPS but accretive to BVPS. As a result of the equity
issuance, TSU’s share count increases 3.5%. However, the impact on EPS
will be partially mitigated by the investment of proceeds into a high-yield
environment. We crudely calculate the net impact to our EPS estimates to be
in the range of -1.5% to -2.0%. In addition, issuing shares at a premium to
book value is accretive to BVPS. Based on the offering price and quantity of
shares issued, we estimate that the offering will have a +6.3% accretive
impact to Trisura’s BVPS. Using our pro forma BVPS calculation, we
estimate that the company now trades at 2.6x.
Leaning on external sources of financing to fund growth. As a
generalization, we believe that public companies should rely on external
sources of financing to fund growth opportunities when the anticipated return
on that capital exceeds the cost of capital. Considering that Trisura
generates an operating ROE of nearly 20% (enterprise-wide), we believe
there is merit to accessing the capital markets rather than intentionally
moderating growth to a pace that can be sustained by the level of internal
capital generation.