Interest rates lift business for XPS

Apart from the bump in the road that was the LDI crisis last autumn, anything pension related has been performing well in the expectation that higher interest rates will lift defined benefit schemes into surplus, thus creating new opportunities for the administration companies and advisors that keep the industry working. XPS (XPS) finds itself in the fortunate position that demand for its services is directly linked to how much volatility there is in the market.

Pensions investment consulting proved to be one of the fastest-growing areas for XPS during the year, with sales for this segment up over 30 per cent to £18mn. Many defined benefit pension funds have moved into surplus over the past 12 months and this has created a dilemma over what to do with the additional money, which is where XPS can help with its advice. The bolt-on addition of Penfida also helped to expand its advisory capacity. The company’s relatively fixed cost base accounts aided operational gearing, with additional sales flowing directly to the bottom of the income statement.

Around 50 per cent of the growth in earnings is due to inflation-linked clauses in contracts, "though we only charge this on the anniversary of the contract itself”, said co-chief executive Paul Cuff. This meant across many of XPS’s business lines, earnings were able to keep pace with rising inflation, although the company also points out that it has been taking on higher-margin work in greater volumes as well.   

Shore Capital has XPS on a price/earnings ratio of 13 times its 2024 EPS forecasts. That looks good value in the context of the company’s growth potential. Buy.

Last IC View: Buy, 143p, 25 Nov 2021