- Annual pre-tax profit rises 11 per cent to record £7.7mn
- EPS hits all-time high of 13.9p
- Total dividend per share of 13.5p for 2021 excludes special pay-out of 8.5p
- Well placed to benefit from interest rate upcycle on cash under administration
Jarvis Securities (JIM:243p), a financial services outsourcer and retail client stockbroker, has reported another set of record results but it has been a year of two halves.
That’s because market uncertainty since the autumn has subdued trading volumes of the 100,000-plus retail clients who use Jarvis’s ShareDeal-Active and X-O low-cost online share trading services. Volumes are still above the historical long-term average given the growth in the underlying client base, but they are not as high as in the first half when the group reported pre-tax profit of £4.6mn. In the second half of 2021, pre-tax profit of £3.1mn was impacted by the less favourable equity market conditions.
So, although annual pre-tax profit increased 11 per cent to a record £7.7mn on 7 per cent higher revenue of £14.3mn, the result was shy of the upgraded pre-tax profit estimate of £8.5mn (from £7.4mn) house broker WH Ireland pushed through at the interim results last summer. Moreover, given the current general market uncertainty, analyst Nick Spoliar has pulled back his 2022 pre-tax profit estimate to £7.3mn (from £8.6mn) based on annual revenue of £13.5mn.
That said, quieter activity in the retail broking division has been offset by ongoing growth on the corporate part of the business, which provides financial administration services to pension funds and wealth managers looking to outsource these activities. Jarvis takes a cut of the interest income on more than £350m held for clients as cash under administration, a point worth noting given that the interest rate cycle is turning up, and new client funds are “up to a level that we haven’t seen for two years with further increases likely”, says chairman Andrew Grant.
Grant adds that “much of the cash we administer is maturing in the short term and will be available to capture increases in interest rates as they materialise.” Interest income has minimal associated marginal costs, so small incremental rises in the Bank of England base rate have an accentuated impact on Jarvis’ interest income.
Against this positive outlook, Jarvis is experiencing cost increases from many of its suppliers, some of which have been passed onto its commercial customers. However, the board’s preference is to offset cost increases through ongoing growth to maintain the corporate division’s competitive pricing model.
The earnings miss and a less favourable equity market backdrop – the FTSE Aim All-Share Total Return index has fallen by 21 per cent since my last article (‘High yielding repeat buying opportunity’, 11 November 2021) – explains why Jarvis’ share price has also declined. After taking account of 6.5p a share of dividends, you are currently sitting on a 13 per cent net paper loss. That said, the holding is still showing a 152 per cent total return since I reinitiated coverage at 115p (‘Jarvis offers medium-term value’, 15 August 2018), after factoring in 49.75p a share in dividends.
My major issue is that the earnings cycle has turned in the short-term, Jarvis' first half results for 2022 have a tough comparable, and the Bank of England may hold back on raising interest rates given that the fiscal squeeze on consumers is taking the heat out of the economy. So, although the dividend offers yield support, I am erring on the side caution and taking profits.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].
Promotion: Subject to stock availability, the books can be purchased for the promotional price of £10 each plus £3.25 postage and packaging, or £20 for both books plus £3.95 postage and packaging
They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on www.ypdbooks.com.
