Broker Network Share Discussion Threads

[recruiter] 05/7/2007 15:32

they wont be able to afford cover next year, to busy paying for a new home.

[geovest] 05/7/2007 15:28

Also, people who are currently uninsured and got caught or are concerned by the storms may now try to get cover, thereby increasing business for the brokers and insurers.

[recruiter] 05/7/2007 15:21

no. its the insurers that pay not the brokers. In fact next year it will help as Insurers will no doubt increase rates which will in turn increase the broker commissions.

[abundance99] 05/7/2007 15:20

Does anyone know if the floods are likely to have an effect on BNH with all those branches in the north of England?

[geovest] 05/7/2007 09:03

Recruiter, sorry I was away from the screen for a while. If anyone else needs it its CBRA

[recruiter] 05/7/2007 08:48

its okay, I have it.
Have to agree the float was an almighty flop.

[recruiter] 05/7/2007 08:35

Geo, do you have an epic for the stock of COBRA - thanks.

[geovest] 05/7/2007 08:28

For those still interested in the Cobra listing:

Cobran announced that it will commence trading today on AIM.
Their pre-listing press interview said they wanted to raise £10m with the listing. The original Prospectus stated that it intends to place X (blanked out) number of shares at a price of £Y (blanked out) and that the proceeds will be used as follows:
£ 2.73m to repay loan notes
£1.2m to repay debt
The rest for working capital and acquisitions
In addition, the directors wanted to sell some 5.387m shares as part of the placing.

The reality:
It managed to place 1.0m shares at 97p
The proceeds of £0.99m will be used as follows:
£0.8 to pay listing cost
£0.2m for working capital
Directors didn't manage to sell any shares. Free float will be around 3% initially.

In my original write-up I concluded that Cobra management seems to over-promise and under-deliver. This seems to confirm that view.

[geovest] 04/7/2007 13:05

NJP, I fully agree with you that one should never get too attached to a stock or a growth story. Always base investment decisions (buy, sell or hold) on thorough evaluation of the facts, not emotion, just like any well considered business decision. Most of us learned that the hard way, but sometimes its easier said than done.

With BNH the facts still support the growth story very strongly!

[njp] 04/7/2007 12:28

Geovest

'SMC - big divergence between profit and cash flow...acquisition policy too aggressive'. Absolutely right. I was an early follower myself and stayed in too long, despite having some of those very thoughts. That's the trouble with getting too attached to a story; one tends to rationalise away those warning signs that could save you a fortune.

At the very least, if the story's still good but doubts start to appear, reduce your holding.

Greed vs fear, eh! ;-)

No such worries here though, I hasten to add!

[geovest] 03/7/2007 16:38

You are welcome.

[diogenesj] 03/7/2007 13:55

Thanks for the info on Cobra, Geovest. Nice post, and saves me reading the prospectus! :-)

[geovest] 29/6/2007 12:57

Small NMS is a pain for online trading but if you have a larger number to buy or sell you can either put a limit order online or phone your broker with the order. You may end up paying or losing a few pence on the price for orders above say 3000, but its generally fairly easy to trade larger numbers. Shouldn't really make difference which broker you use but as usual some have a better service then others.

[mhelliwell] 29/6/2007 12:36

Hi, I'm currently a smallish holder but had a larger position back in 2004/05. I remember really struggling to sell (unfortunately I needed the proceeds at the time) due to the small NMS and general illiquidity at the time. I'm interested in adding again now but I'm concerned about illiquidity. Do any of you have a way of getting round this or found that certain brokers are better than others? Thanks in advance.

[geovest] 29/6/2007 08:58

Dreggs, that's true, but there are normally some warning signs. I looked at SMG and rejected it because there was a big divergence between profit and cash flow and the acquisition policy was a bit too aggressive for my liking. With AVG the bulk of the business is low margin, low growth which I dislike, but mostly Metalcraft depends on one client for 80% of its revenue and I remember that even when it was previously owned by Ferraris it disappointed with order delays etc.

There is always a risk to a concentrated portfolio, but if you know the industry, watch the margins, cashflow and debt, the rewards could be substantial.

[dreggspicker] 29/6/2007 08:12

yes I know what you mean Geo, but I thought SMC & avingtrans looked good to,but looked what happened to them!

[geovest] 28/6/2007 23:55

Mine is even higher, partly because it has performed so well, but also every time I sell something I evaluate what opportunities there are and most often I come back to BNH. The combination of growth potential, profitability and cashflow at a very low valuation is hard to find. Its a straightforward business at a low valuation, therefore the risk factors are low and I don't mind if it becomes a disproportionate size in my portfolio.

[dreggspicker] 28/6/2007 18:25

Trouble is, I'am already up to 20% of my porti in BNH so I am alittle wary in adding much more; But then again, perhaps a few more wouldn't harm,on any general dips, I would have to sell something else though to fund it.

[geovest] 28/6/2007 12:23

Hi there, I remember, you sat next to me. I also added after the AGM and have not yet stopped buying. Its been very profitable for me and should continue for a few years still. I'll see you at the AGM later this year.

[dreggspicker] 28/6/2007 08:41

Geo, I'am the one who kept banging on about company debt at the AGM,I did add to my holding afterwards, sure glad I did!
I know it's early, but I hope to make the next AGM; There's free tea AND biscuits,even choco ones.

[geovest] 27/6/2007 08:49

No problem

[dreggspicker] 27/6/2007 08:12

yes, very good post Geo,thanks

[km1966] 26/6/2007 22:39

Good post Geovest, thanks for your views and comparison with BNH.

[geovest] 26/6/2007 15:20

My views on Cobra. Please note that these are my views and opinions only and the information should not be viewed as advice or relied apon. Please do your own research. I've tried to be as accurate as possible, but no guarantees.

I worked my way through the prospectus and even though it said 'Final version' it wasn't as it still didn't tell me how many shares were to be placed and at what price and what is the resulting Director's shareholding will be. It did tell me that the directors will sell some 5.387m shares in the process. The press said that they intend to raise £10m, probably including Directors sales.

The prospectus states they will use £2.73m to repay loan notes relating to previous acquisition (from directors by the looks of it), £1.2m to repay debt and the rest for working capital and acquisitions.

The group consists of:

Cobra Network
Established in 2003, now around 100 members with combined premium income generated of £350m.

Cobra Insurance Brokers
Directly owned brokers generating commission income. Truman Lincoln, BKG Ins Brokers, BKG Corporate risks (all network founding members)

Cobra Corporate Solutions
Handles complex risk placements for the network

Cobra London Market
Wholesale insurance broker

Cobra Underwriting Agency
Underwrites risks for the network. Expects to underwrite £8m in 07 and £18m in 08

Cobra Financial Services
Independent Financial Adviser

Cobra Insurance Management
Admin services to the group

Financials:
(The group was incorporated from 06. Figures for 04&05 are aggregated results of all companies in the group)

2004 2005 2006

Revenue (£m) 5.755 8.625 8.956
Operating Profit 0.948 2.087 0.612
Profit before tax 0.625 2.087 0.612
Profit 0.385 1.413 (0.01)
EPS 1.1p 4.2p 0.0p

Cash generated from operations 518 873 (289)

Shares in issue before placement & listing: 36.15m


The results for 06 were unimpressive to say the least. Management blames it on increased cost to support and grow the network (even though this is not reflected in income growth!) and exceptional integration cost bringing the group together. Cash flow was poor in both 05 and 06.

Comparison with Broker Network Holdings

The two compete directly for Network members and direct acquisition of Brokers and both operate nationally, but the core base of Cobra is Southern and that of BNH is Northern. There are however some very distinct differences in the operating models of the two groups on the Network side.

Please note that I have gathered the following information from various sources and it may not be totally accurate, but it gives an idea of how they operate.

Network Revenue: Cobra BNH

Monthly Membership fee No £95 pm
Share of Base Commission No +- 10%
Over-riding Commission Yes Yes
Profit share commission Yes Yes
Bonus target over-rider Yes ?
Marketing Allowance Yes ?
Shortfall Fees (Member penalties) Yes No

The big difference is that BNH takes a share of the underlying commission which explains why BNH in 2006 generated network revenue of £7.3m from 155 members compared to Cobra £2.7m from 100 members. The Network business is FAR more profitable than the direct broking business and explains why BNH if more profitably by a considerable margin.

Cobra network on the other hand generates revenue from over-riders, target bonuses and profit shares. The problem is that if you set aggressive growth targets and penalties for not achieving targets, it normally results in pressurised members writing poor quality business, which erodes profitability, impacting on profit share commission.

Both underlying broker businesses have been operating for many years. BNH was established in 1994 and have a long history of strong organic growth, increasing substantially over the last 3 years since listing. Cobra Network was formed in 2003 and has grown very aggressively since then, but they have grown expenditure much faster than revenue and profitability suffered. In Nov 2005 Cobra had 86 Members and said it would grow this to 125 and Premiums to £500m by end of 2006. We are now halfway through 2007 and they have only grown to 100 members and £350m Premiums. It may therefore be argued that Cobra management over-promise and under-deliver, compared to BNH management that under-promise and over-deliver.

Cobra's stated acquisition objectives are to finance acquisitions mostly with share issues (this dilutes the equity of current holder) and use deferred consideration extensively (this can be good, but generally makes acquisition cost more and result in more dilution for existing shareholders). BNH on the other hand tend to buy outright using cash generated from the operation and moderate debt, with no dilution to shareholders.

Conclusion:

Cobra may be more aggressive in its business strategy, but in my opinion, BNH have the better operating model, producing higher profit margins and better cash flow. They also have a better track record of profitability and delivering on forecasts. I will keep an eye on Cobra to see how it develops, but will not invest for now. My money stays with BNH.

[geovest] 26/6/2007 07:46

ramu, yes, I will post something today when I get a chance.