We expect patient investors to be well rewarded as the full benefits of R&Q’s investment in its two core divisions become visible over the next 18-24 months.
Underlying FY18 results confirm operational progress in line with strategic targets. Investment to date has established two high potential operations.
The first, Programme Management (PM) continued to grow organically. Its prospects were buoyed by an upgrade in its A.M. Best rating, a US$70m bond issue in December and a £103.5m equity issue post the year-end. The high rating is key to attracting enquiries from prospective new PM partners. The second division, Legacy/run-off secured further acquisitions in FY19. These included Global Re, its largest legacy deal to date, which received regulatory approval post the year-end.
The group’s two divisions’ have distinct earnings patterns. PM builds gradually, but new operations incur expenses upfront as they build books of high quality, reproducible earnings. We don’t expect divisional growth to add materially to pre-tax profit this year. Legacy purchases can be difficult to forecast, particularly timing, but in contrast to PM can contribute to profit on day-one under group ownership. R&Q seeks to buy run-off insurance assets at a discount to book value, book an initial profit, then work acquired portfolios to release revenues over an extended period.
Further scale advantages are derived from returns from a substantial investment portfolio and its access to a single support staff/infrastructure. The shares are on undemanding ratings that appear to ignore clear growth opportunities.
We expect both divisions to achieve target scale in 2020 and fully contribute from FY21. Our forecast includes a substantial initial contribution from Global Re this year, then progressive growth from PM from FY20. R&Q reports a strong pipeline of PM enquiries and potential legacy acquisitions, and complementary revenues should create a stable revenue base and support a progressive distribution. The latter is paid from capital, so the 5.0% prospective yield is tax-free to UK private investors. NAV forecasts reflect a £103.5m equity issue post the year-end and retained earnings, net of dividends.