Briefing: Ardonagh's results - the verdict

Briefing by Saxon East 

Chief executive David Ross says the lion has roared with strong results, great acquisitions and a thirst to conquer the international stage.

But what exactly do the 2017 full-year numbers tell us?

The key questions are these: How are the main businesses performing? How much money is Ardonagh actually generating? Finally, where is Ardonagh heading?

Let’s start with the financials. 

The headline loss is £260m, but this includes technical accounting such as amortisation.

Since Ardonagh, and previously Towergate, has always been a ‘buy and build’, there will be some amortisation, the writing down of goodwill, of the acquired brokers. 

There is no money going out here, although it feeds through into the ultimate profit and loss. 

Therefore, a better metric of financial performance to look at is the EBITDA.

Here we learn that the EBITDA, namely the earnings of the company, stands at a £42.5m loss.

The EBITDA does not include one very real cash item - the interest on the debt. 

The accounts reveal the finance costs, the interest payments, are £77.4m.

On these metrics alone, we have a business that has negative earnings even before the interest on the debt is paid.

Knowing these figures, how can Ardonagh move forward with confidence? 

Acquisitions boost 

There are some important factors to consider here.

The first point is that David Ross and his team have inherited a business that has some serious legacy issues – these include regulatory costs, fixing the small business unit, historic issues in underwriting portfolios.

Ross has been upfront about this and the 2017 results show money is still being spent on fixing historic problems.

Money is also being spent on large capital projects, such as bringing the commercial trading onto one Acturis platform.

Ross claims these issues are mostly temporary and are largely fixed.

Assuming going forward Ardonagh manages to sort these issues out, then we can strip out those exceptional items and ‘adjust’ the earnings, This leaves an adjusted EBITDA of £79.8m.

Importantly, Ardonagh will also benefit substantially from all the acquisitions it has made.

Ardonagh estimates earnings will hit £161.5m once all the acquisitions it has made are included. 

That figure puts space between the interest on its debt and leaves room for any other future one-off costs.

Ross has more acquisitions in the pipeline, which would certainly help generate even more earnngs, although it is unclear exactly how much is left in current funds for acquisitions.

Presumably, Ardonagh is using up current debt funds for acquisitions, so unless there is even more borrowing, the interest on the debt will remain similar.

Meanwhile, the business units are doing well enough – wholesale and distribution showed some organic growth.

MGA and Services had a challenging year, and one wonders why the problems were not spotted sooner, but better late than never.

The integration strategy is correct – leave the brands, but integrate it behind the scenes using latest technology.

Ross has recruited some good people– such as Rob Worrall in retail, Ian Donaldson in digital and Paul Dilley in underwriting – to help push the business on.

Ardonagh future 

So it’s clear there are issues to fix and we await the full earnings impact of acquistions. Ardonagh has some time on its side. Ardonagh is paying 8.36% on £400m bonds and 8.625% $520m bonds – both due in 2023.

Unless its private equity backers are in rush to exit, Ardonagh has at least another three years to iron out historic issues and improve cash generation.

If it can do that successfully, it will have options whether it be a trade sale, flipping over to new private equity owners or issuing new debt to pay off the old if markets are favourable.

It could possibly float, leaving some debt on the balance sheet.  

The bottom line is that Ardonagh is still a work in progress. Ross and his team have laid the foundations.The acid test now begins. 

The market will expect Ardonagh’s 2018 results by this time next year to show a business throwing off cash after all costs are accounted for. 

Ideally, Ardonagh’s earnings should cover the interest at least three times over after all the costs. 

Over to you, David Ross.