Towergate broking revenues remain flat despite 19 acquisitions

Towergate’s core retail broking division posted flat revenue growth in the first nine months of 2012 despite the consolidator making 19 acquisitions in the period.

However, the position was an improvement over the 2% decline seen at the half-year stage, and profitability at the division continued to improve, with earnings before interest, tax, depreciation, amortisation and exceptional items (EBITDAE) increasing 6%.

Towergate’s retail division, which makes up 59% of its revenues, reported nine-month 2012 revenue of £194.6m, almost unchanged from the £194.9m it reported in the same period of 2011.

Following on from the 19 acquisitions made in the year to 31 September, Towergate has continued to snap up smaller brokers. The total for the year to date is 24, including the most recent acquisition of Northern Ireland-based Dawson Whyte.

Business as usual

Towergate chief executive Mark Hodges said that under Towergate’s business model, it typically takes between 18 months and two years for the company to see the full benefit of acquisitions.

He said: “The bigger uptick from the deals we have done in 2012 will be in 2013. Then the challenge is if we can repeat this kind of level in 2013, which will help us build into 2014.”

He added: “We want to see the smaller deals as a business-as-usual activity.”

Hodges declined to speculate how many deals Towergate would complete in 2013, but added that the pipeline was strong.

He added that the retail division had seen a small boost from acquisitions, as retail division revenues were now flat rather than falling, as they were at the half-year stage.

Hodges said: “You see a combination of some work internally in terms of improving retention and new business but also a small impact of some of those acquisitions coming through.”

Retail broking EBITDAE, which Towergate terms operating profit, was up 6% to £63.7m (9M 2011: £60.4m).

Overall performance

Overall, Towergate made an EBITDAE of £119.5m in the first nine months of 2012, up 5% on the £113.6m it reported in the same period last year.

However, the statutory profit before tax worsened by 2% to £42.4m (£41.6m).

Cost cutting continued to contribute strongly to the EBITDAE growth, accounting for roughly  three percentage points of the increase. The broker trimmed its expense ratio by 2.8 percentage points to 66.9%.

The broking group’s revenues were up 2% to £329m (9M 2011: 324m).

Hodges hailed the overall performance. “I am pleased to be reporting results for the third quarter that show year on year improvements in group income and group earnings.

We remain focused on growing our business and executing our change programme while maintaining momentum in our programme of acquisitions.  It is encouraging to see the results of this focus contributing positively to our operating results.”

The company’s underwriting and Paymentshield divisions continued to be the best performers. Revenues grew by 8% in both cases. The underwriting division’s profit was up 12% and Paymentshield’s increased 14%.

Network woes continue

However, the network division was unable to shake off its difficulties in the third quarter. Revenues were down 14% to £13.2m and profits were down 18% to £8m.

However, Hodges was sanguine about the network division’s future. He said: “As we go towards the end of this year, we are optimistic that is a business that can grow for fundamental strategic reasons.

“The kinds of services the network division provides, whether that be compliance, HR, or consultancy, given that there’s so much change in the sector, is a really good base to grow that business from.”