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High yielding repeat buying opportunity

Investors are underestimating the upgrade potential of a financial services outsourcer and retail client stockbroker.
High yielding repeat buying opportunity
  • Third-quarter trading volumes across Aim rise 6 per cent
  • Fourth-quarter dividend per share raised 12 per cent to 3.5p to lift the 2021 payout to 13.5p excluding 8.5p special dividend in August

Jarvis Securities (JIM:285p), a financial services outsourcer and retail client stockbroker, looks primed to deliver a strong second-half operational performance and one that supports a share price rally back to this summer’s highs (369p).

Analysts at house broker WH Ireland pushed through 15 per cent earnings upgrades at the time of July’s half-year results after the company reported 28 per cent higher pre-tax profit of £4.6m on revenue up a fifth to £8.1m. This means that Jarvis only needs to report second-half pre-tax profit of £3.9m, up from £3.3m in the second half of 2020, to hit the broker’s full-year pre-tax profit estimate of £8.5m. It could easily do better.

That’s because the 100,000-plus retail clients who use Jarvis’s ShareDeal-Active and X-O low-cost online share trading services continue to benefit from favourable trading conditions. This is reflected in total trading volumes on London’s junior market. In the third quarter this year, £21.3bn-worth of shares of Aim-traded companies passed through the market, up 6 per cent on the same quarter in 2020, and well ahead of the £18.8bn average for the first two quarters of 2020.

Moreover, having onboarded two new institutional clients during the first half of this year to complement strong organic growth, Jarvis has a healthy pipeline of enquiries from pension funds and wealth managers looking to outsource their financial administration services to its corporate division. WH Ireland has taken a conservative approach for new client acquisitions in its forecasts. In addition, Jarvis takes a cut of the interest income on more than £300m held for clients as cash under administration. Clearly, with interest rates on the floor this income stream has not been significant in recent years.

However, it’s worth considering now. That’s because the Bank of England is expected to finally tighten monetary policy by normalising interest rates throughout next year, and perhaps beyond, which will ultimately have a positive impact on Jarvis’s earnings. There is no marginal cost associated with interest income, so the incremental income earned will all go straight to the bottom line.

The point is that Jarvis not only has potential to outperform WH Ireland’s 2021 profit forecasts, but I can see upgrade potential to the broker’s 2022 pre-tax profit and earnings per share (EPS) estimates of £8.9m and 16.3p, respectively. There is upside potential for the dividend, too. Having raised the 2021 dividend by 21 per cent to 13.5p a share (excluding a special payout of 8.5p a share paid in August), I would not be surprised at all to see the board exceed analysts' 13.9p a share dividend forecast for 2022. This is a highly cash-generative asset-light business with limited capital expenditure requirements that is now earning a 100 per cent post-tax return on equity, so the directors are able to return a high proportion of post-tax profits to shareholders.

Jarvis’s share price smashed through my raised 330p target price to hit an all-time high of 369p after my last buy call, at 275p (‘Targeting asset light cash generators’, 19 July 2021), before giving back those gains on profit taking. That process seems to have run its course as the 275p level has been tested three times since mid-September and has held each time. The 14-day relative strength index (RSI) reading on the last test of the 275p level was much higher than the first, the positive divergence being a signal that the profit taking has run its course.

So, having reinitiated coverage at 115p (‘Jarvis offers medium-term value’, 15 August 2018), and banked 43.25p a share in dividends, I see potential to add to the 181 per cent total return on the holding. Underpinned by a healthy 4.9 per cent prospective dividend yield, and rated on a forward price/earnings (PE) ratio of 17.5, I am raising my target from 330p to 375p. Buy.

 

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