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OPINION

A solid income buy

A solid income buy
February 25, 2013
A solid income buy
IC TIP: Buy at 215p

Moreover, with the shares trading on a modest 12 times 2013 earnings estimates and the company in a cash-rich position, there is potential for capital upside over time as earnings grow and the dividend is raised. That's because we not only benefit from a regular income stream – dividends are paid on a quarterly basis in March, June, September and December - but if the earnings multiple stays at this modest rating, the share price can be expected to rise in line with the 13 per cent annual growth rate in profits forecast by analysts over the next two financial years. In other words, this is an investment that could realistically provide a conservative total return of around 25 per cent over the next 12 months through a combination of earnings growth and dividends paid.

The company offering this attractive investment opportunity is Jarvis Securities (JIM: 220p), a stockbroker and financial services outsource provider, which was founded in 1984 and has been led by chief executive and chairman Andrew Grant ever since. Jarvis is a member of the London Stock Exchange and was first quoted on the Alternative Investment Market in 2004.

On the retail side, Jarvis offers two main products: ShareDeal-Active, a low-cost execution-only service for nominee and certified accounts, Isas, Peps and Sipps; and X-O, an online share trading service enabling clients to trade for a flat fee of £5.95 per trade, one of the lowest rates in the market. Boosted by the launch of X-O, retail client numbers have been growing strongly at an annual average rate of 13.8 per cent over the past five years, with very little advertising according to Nick Spoliar, analyst at broking house WH Ireland. Jarvis now has more than 60,000 retail clients ranging from multimillionaires to day traders and screen-based dealing now accounts for half the business by volume. It will shortly be gaining greater exposure to the pension retail market by launching the company's first low-cost execution-only Sipp product.

On the corporate side, Jarvis provides outsourced and partnered financial administration services to a number of third-party organisations, including advisers, stockbrokers, banks and fund managers. The business tailors its administration processes by offering a bespoke service to meet the needs of each organisation and has built up a strong reputation for flexibility and cost-effectiveness. Jarvis does not disclose names of its clients, but is believed to have more than 25 household-name institutional clients, including asset management group Franklin Templeton and Goldman Sachs, attracted by the convenience of outsourcing time-consuming and laborious back-office/administration functions.

In terms of income generation, around £2.8m of revenues in 2012 came from interest earned on broking accounts, cash in the bank and overdrawn client accounts, with the balance of £3.3m earned mainly from fees and commissions. Cash under administration has averaged around £70m for the past couple of years and is normally placed on a short-term deposit of less than one year with triple A rated banks. That's well worth remembering because when interest rates start to return to more normal levels, the increase in interest income will provide significant profit upside to Jarvis.

Earnings upgrades

In last week's results for 2012, Jarvis reported a 38 per cent rise in interest income, which boosted pre-tax profits by 22 per cent to £2.35m on revenues of £6.1m. EPS increased a fifth to 16.64p and supported a double-digit hike in the dividend to 11.25p a share, up from 10p in 2011 and 9p in 2010. Moreover, reflecting a growing suite of products being marketed to a wider and larger client base, and management "confident of continuing the double-digit growth", WH Ireland raised pre-tax profit estimates for both 2013 and 2014 by 13 per cent to £2.6m and £2.9m, respectively. On this basis, EPS is upgraded to 18.1p and 19.8p, which means the shares are currently being rated on a modest 12 times 2013 earnings estimates, dropping to 11 in 2014. Moreover, Mr Spoliar now expects dividends of 12.5p to be paid out this year, rising to 13.9p in 2013, so the prospective yield is a healthy 5.7 per cent, increasing to 6.3 per cent in 2014. And these are paid quarterly, so provide a regular income stream. It's also worth noting that net cash trebled last year to £3.6m, worth 34p a share.

Target prices

WH Ireland upgraded its target price 12 per cent to 280p post the results, but I have a fair value estimate of 260p, which would provide us with 18 per cent share price upside over the next year and dividends worth almost 6 per cent of the current share price to produce a total return of almost 25 per cent. If achieved by this time next year, the shares would be rated on 13 times 2014 earnings estimates and offer a forward yield of 5.3 per cent. On a bid-offer spread of 217p-220p, Jarvis shares rate a medium-term buy.

Please note that I have published two articles today, including a column on an investment company that could conservatively provide us with another 15 per cent share price upside in the coming months ('From Russia with profits', 25 Feb 2013).

■ Finally, I will be taking a four-week break during April to complete a book on 'Profitable stockpicking', my follow-up to Trading Secrets: 20 Hard and Fast Rules to Help You Beat the Stock Market. The book will be published in early summer

MORE FROM SIMON THOMPSON ONLINE . . .

Since the start of this year I have written no fewer than 35 online articles, all of which are available on my homepage. These include articles on the following companies:

IQE (Qualcomm news hits IQE shares, 22 February 2012)

Terrace Hill and Randall & Quilter (A flying start, 21 February 2013)

WH Ireland (Broking for a successful recovery, 19 February 2013)

Anglo Asian Mining ('Glistening investment loses its shine', 18 February 2013)

Communisis ('A fundraising well worth backing', 18 February 2013)

Town Centre Securities (A high yield property play in the north, 18 February 2013)

API ('A conundrum to solve', 15 February 2013)

Daejan Holdings ('Buy the breakout', 14 February 2013)

IQE ('Time to dial into profit', 13 February 2013)

Mountview Estates ('Chart break out for a solid income play', 12 February 2013)

Bellway ('Seeking Alpha', 11 February 2013)

Marwyn Value Investors ('A highly profitable arbitrage play', 11 February 2013)

Netplay TV ('A share set to hit the jackpot', 11 February 2013)