Since striding onto AIM two years ago, Broker Network has made something of a splash, consistently improving sales and profits, and embarking on a successful acquisition strategy. It is now on the radar for bigger opportunities and, such are its prospects, chief executive Grant Ellis senses that ‘critical mass is coming’.

In its present guise, BN has a 161-strong network of general insurance brokers. To attract members it offers a combination of centralised services – including IT, human resources and marketing – as well as the much cheaper insurance terms that its bulk-buying power provides. In return, members must place all business through BN and pay it 2.3 per cent of each premium they write. The reduced price of insurance is so much cheaper than this fee that the terms remain very attractive to brokers.

The majority of the network is made up of 142 independent members, to which BN is looking to add another 30 this year from an already-strong pipeline. Ellis expects to attract increasingly larger members because, as the average size of members on the network increases, other larger insurance brokers are seeing that they too can benefit from inclusion in the BN fold. He is targeting a total of 250 members by 2010.

To increase its margins, BN occasionally acquires one of these underlying broking companies, often from existing members who wish to retire. 19 such brokers are now owned by BN, providing an average 16.1 per cent of each premium, on top of the standard 2.3 per cent.

Over the last three years, BN has acquired companies turning out an average of between £1.5 million to £4 million gross written premiums (GWP), mostly from within the network. Its most recent buy, however, delivered a considerably larger GWP of £54 million.

This was TL Risk Solutions, the insurance broking division of Towry Law Group. BN pipped a number of trade buyers to the £12.5 million purchase because the TLRS management preferred BN’s proposed MBO-style incentives. The new management team is tied in for at least five years and will operate the business as a separate entity, much like a larger version of an independent network member. Thus the drain on BN is not much bigger than usual and the purchase should bring it to the attention of those advising on the sale of similar business in the future, such as KPMG, which brokered this particular sale.

In the year to April member numbers increased 12 per cent and the number of owned members by six. Financials for the period came in ahead of expectations and showed profits before tax increased 81 per cent to £3.3 million on sales up 65 per cent to £12.5 million. Fully diluted earnings per share advanced 52 per cent to 10.27p and the company announced a maiden dividend of 1p per share.

£1.9 million cash was left at the period-end and analyst Stephen Thomas at house broker Teather & Greenwood expects gearing resulting from the TLRS acquisition to reduce from 130 per cent to 65 per cent by April 2008, due to strong cash inflow. He forecasts profits before tax to improve 50 per cent to £5.1 million this year, giving earnings of 24p.

Although the shares have steadily appreciated since arriving on AIM at 71p in May 2004, they are valued at a substantial discount to quoted insurance brokers and trade at less than eight times next year’s earnings. Buy.