Interesting thread. It appears a lot of people here are using...

Interesting thread. It appears a lot of people here are using NTA as a floor but the effect of St Andrews acquisition doesn't not appeared to be mentioned here. The $65m deal that will close soon is more than the entire market cap of Freedom alone, so touting the long-term outlook of Freedom without taking into account St Andrews is ignoring half the business.

If we do a pro-forma balance sheet based on St Andrew's FY2017 to Freedom's FY2018, by my calculation NTA falls to around 19 cents per share, reduced by $3.9m cash outflow, $16m goodwill and $20m debt. However, majority of St Andrew's business is mortgage insurance and focus on corporate sector, so it is unlikely the assets will be impaired as result of current regulation scrutiny, in such a case net assets per share is around 28 cents. Say Freedom's intangible gets a 100% write off next year, wipe that $5.8m and net assets post acquisition becomes around 25 cents/share.

What about profit, assuming St Andrew maintained same level of sales as FY17 and Freedom same profit in FY18, with a profit margin of 15% then post acquisition profit is circa $12m. Assume a cost of capital of 10% with no growth and PE of 8, intrinsic value is around 46 cents a share, at current prices this stock is trading at 50% discount. I note Bell Potter recently released a price target around 39 cents, I haven't seen their report but I assume it hasn't taken St Andrews into account.

What are the risks, the UK had a royal commission similar to Australia on direct insurance, and as a result they banned trailing commission which make up half of Freedom's business. Now, let's say that did happen, and as double whammy they ban outbound calls altogether, the trailing commission should not be effected materially because it is based on PV of premium in force (unless its customers start mass switching to other insurers), the UK government did not cancel existing trailing commissions locked in prior to the ban came into effect. If outbound calls are completely banned, intrinsic value becomes around 33 cents post acquisition, assuming the growth from St Andrews will offset the inevitable decline of trailing commissions.

I'm no expert and this is all just back of envelope calculations, what is certain is that fear is dominating this stock without taking into account the effect St Andrews, which is largely insulated from the current crisis. In addition I think St Andrews was a shrewd buy and says something about the management, at 40% discount it will set a floor around 20 cents in a worst case scenario, it is getting close to that and I ain't gonna quibble over a few cents, I'm buying. There will be considerable volatility in short term, and fear may drive it well below 20 cents pending further negative news, but over a 12 months horizon the odds appear to favour upside.

Any thoughts??