Mike Askew and Martyn Hughes of CBG Group talk to Stockopedia

When Mike Askew and Martyn Hughes stepped up to take the reigns of CBG Group (LON:CB.) in October 2007 the AIM listed insurance broker and financial services group had just wrapped up its 14th acquisition in seven years. But with few signs that a prolonged market cycle of soft insurance rates would pick up any time soon and an economic downturn ready to bite, the team set to work on integrating the group’s network, streamlining the business and opening up new service lines. While market conditions are still fragile and the scope for good quality acquisitions still limited, Askew, the managing director and Hughes, the finance chief, are confident that the business is well positioned to grow.

In its interim figures to June, CBG reported an 11.6% decline in revenues to £4.0m but a 34.1% rise in Ebitda to £0.9m and a strong increase in its broking margins to 23.6% from 16.4% previously. Year-on-year, debt was down to £0.7m from £2.5m, supported by a flexible banking facility signed in May 2009 with Close Premium Finance, which effectively outsourced CBG’s premium financing activity. For investors eyeing the wider sector, CBG’s presence in the non-life insurance segment of the AIM market means that its peers range from the likes of Abbey Protection (LON:ABB) , Ai Claims Solutions (LON:ACS) , Thb Group (LON:THB) , Personal Group Hldgs (LON:PGH) and Brightside Group Plc (LON:BRT) .

Stockopedia spoke to the CBG management team about why prudence will prove to be a virtue as market conditions improve and when acquisitions might be back on the agenda.

What do your interim results say about the shape CBG is in and the state of your markets at the moment?

Mike Askew: The numbers have been seen in the light of what is going on in the bigger world and that we are continuing to manage the business prudently in terms of making sure it is still robust when we are ready to come out the other side of what we’ve currently experienced in terms of the economic climate.

I think the message that we are trying to get across is that in terms of the challenges that we faced over the last 24 months, as a management team, we have taken the right decisions at the right time to de-risk the business. That includes the premium finance arrangement with Close Brothers last year, removing significant amount of debt off the balance sheet and continuing to be cash generative and pay that debt down. We could quite easily have completed possibly a couple of acquisitions in the first half of the year but we have walked away from them because we just felt they were uneconomic, they were not of the quality that we need to be looking at now and would effectively have just been buying turnover. I think we are just going through a period where prudence will prove to be a very good choice when things start to improve.

Which areas of the business have suffered most – has it been the small and medium sized enterprise (SME) side that has caused the most problems?

Mike Askew: Very much so, but we have also been hit in the first half of the year with some bigger corporate losses in terms of administrations, certainly in the first three months. We had a couple of clients that were bought by larger organisations which, at the end of the day, is no fault of the business itself, it is just the time for those businesses to be exiting themselves and being sold on. In the current climate, with the competition out there, it is very difficult to replace those larger losses in one fell swoop, so it takes time for the business to recover from them, but we will do. I think the thing that is most pleasing, from our point of view as a management team, is that we are getting back into those mid 20% margins in terms of the broking profit.

How easy for you has it been to balance the need to cut costs with retaining the integrity of the group in the longer term?

Mike Askew: I don’t think we have damaged that integrity. I go back to the beginning of 2008 and when we did our last acquisition the business had 12 offices – we are now down to three and that tells you the sort of steps we have taken to integrate the businesses where we can. Don’t get me wrong, integration when you are accelerating it, will have a detrimental effect on your revenue because some clients don’t like being moved around offices and you have got to be careful how you do it. But, in general, I don’t think we have damaged the integrity of the business, in fact I think we have actually strengthened it.

Martyn Hughes: We haven’t slashed the costs, they’ve been pruned. We have looked at the business, looked at particular areas and refined it.

How competitive are your markets and what have you done to set yourselves apart over the last 10 years in terms of your proposition?

Mike Askew: You are right, we are in a very competitive market place, it is very much driven by certain sizes, and you try and create certain USPs within your business. One of the things that we are developing through our experiences with the sports business that we have had operating since 2006 is trying to create new niches. We are tending to find that the niches are a lot less competitive than the general run of the mill SME business. We have got an initiative going that we announced at the year end back in March, developing science and technology as an area where we are still seeing investment made in businesses and consequently opportunities for new clients. So that is coming on quite well but it is still only small in its overall impact from the overall business. But what it is doing is making certain sections of our revenue a little bit more, shall we say, shielded from the general competition in the market place because those niche areas have barriers to entry, which has been proved with our sports business.

In terms of further growth – both organically and through acquisitions – which areas of the group would you like to expand?

Mike Askew: We have announced to the staff some operational structural changes with the management team, which will reflect a couple of departures of some directors. One of the things the restructure is all about is getting a little bit more focus and accountability and hands on with our people and, likewise, how they deal with our clients. I think the future, in terms of acquisitions, is that there are few and far between out there that represent true value to shareholders and we are not a management team that 1) is going to overpay, and there’s still an element of expectations too high by vendors, and 2) we’re not just buying the business for its turnover, it has got to be profitable and it has got to fit. We set the bar very high because there aren’t many brokers out there with a broking margin of 23.6% and we think we can still notch that up to get it beyond the 25% margin. So we have set some very high standards in terms of what acquisitions need to meet and to be able to be classed as an acceptable. So I think our short term focus has got to be organic growth and what we are doing is trying to build the structure that will allow that to take place.

From a private investor perspective, how important is the retail investor community to you and how do you sell your story to them?

Martyn Hughes: I think that most companies on AIM find the lack of liquidity a problem. We are seeing quite a lot of 1,000 shares sold that affects our share price by 10%. It is very frustrating, to be fair, and if we did have a larger shareholder base, and that is not knocking institutions, which have been very, very supportive, but if we did have a bit more liquidity in the stock then I’m sure it would certainly help. There are pros and cons to having a liquid stock but we would welcome any investor coming to CBG.

Finally, looking to the rest of the year, how confident are you that the group is now well positioned to grow and what are your strategies in the near term?

Mike Askew: I think we are definitely well positioned, we are continuing to reduce our debt, we are cash generative, and we have got very supportive banking facilities in place. So if the right opportunity comes around that ticks all the boxes then we are going to be in a good shape to conclude a deal and consequently grow the business. But I think there are two factors, we need to see a material change in the macro economic climate, and then, we have been saying it for the last four years, when are the commercial insurance market rates going to start to harden? We have been in a soft market cycle now for what feels like five years. So I am not saying we are going to see the sort of hardening that we saw back in 2001/2002 but just a 10% increase in rates would make a significant difference to our overall performance. So in terms of what the future holds, I think 1) against our peers, we are seriously undervalued in the market, and 2) I think that we have done all the pain, we have been through it, we have got our business fit and proper ready to spring again when the opportunities and the climate allow us to.

Thank you for talking to Stockopedia.

Mike Askew: Thank you.