Jarvis Securities (JIM:490p), a financial services outsourcer and retail client stockbroker, could be on course for another bumper annual profit performance despite suffering a shortfall in the first half of 2018 when pre-tax profits slipped from £2.35m to £2.08m on flat revenues of £4.8m due to the costs (around £500,000) associated with implementing the new Markets in Financial Instruments Directive (Mifid II). Jarvis’ board subsequently restructured its commercial fee tariffs to take into account the additional costs it's incurring.
Bearing this in mind, the board paid out a fourth-quarter dividend per share of 7.25p, up from 6.75p in 2017, to take the total payout to 24.5p for 2018, or 1p a share ahead of house broker WH Ireland’s previous estimate. The directors have a policy of paying out around two-thirds of earnings per share (EPS), so it’s reasonable to assume that the company has recovered the first-half earnings shortfall and could challenge last year’s record results when it posted annual pre-tax profits of £4.4m and EPS of 32.4p. In fact, the board has just announced a 20 per cent year-on-year hike in the first quarterly dividend to 6p a share (ex-dividend on 14 February 2019), something the directors would not have sanctioned unless the business is performing well.
Jarvis’s has two business units: a corporate division, which provides outsourced and partnered financial administration services to a number of third-party organisations and has cash under administration in excess of £150m, all of which is placed on short-term deposit with triple-A-rated banks; and a broking operation that has more than 100,000 retail clients who use its ShareDeal-Active and X-O low-cost online share trading services.
Importantly, the company has been winning new corporate clients – cash under administration increased by 8 per cent in the first half of 2018 – and revenues are likely to have got a further boost by providing corporate customers with more services as a result of regulation. Interest earned from Treasury and bank cash deposits accounts for over 40 per cent of the annual revenue Jarvis earns, so is a reliable income stream.
It’s worth flagging up that the £53m market capitalisation company makes eye-watering returns, and produced a 65 per cent post-tax return on equity in 2017. It’s in a healthy financial position, too – after accounting for £3.6m cash held for settlement purposes, Jarvis had net funds of £5.2m, a sum worth 47p a share, at the end of June 2018. On this basis, the shares trade on a cash-adjusted PE ratio of 13.6, and offer a healthy 12-month rolling dividend yield of 5.1 per cent.
I turned buyer of Jarvis’ shares, at 460p, last summer since when the board has paid out dividends of 13.5p a share excluding the recently declared 6p a share first quarterly payout (‘Jarvis offers medium-term value’, 15 Aug 2018). The 9.5 per cent total return on the holding may be modest, but it’s a resilient performance in the context of the 15 per cent decline in the FTSE Aim All-Share Total Return index in the same six-month period. Moreover, I can see the outperformance continuing and rate the shares a buy ahead of the release of Jarvis’s 2018 annual results. Buy.
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