XPS Pensions (XPS) isn’t a company that will set pulses racing, providing employee benefit and ancillary services to large pension funds. But in the present climate, boring – if it also happens to be reliable – is a good thing. Judging by the 16 per cent share price decline so far this year, the market appears to have overlooked this quality. We think that provides an opportunity to buy into a business with a solid market position, strong dividend yield and highly predictable revenues.
Predictable revenue streams
Rising demand for advice
Opportunities from industry consolidation
Strong dividend yield
Covid-19 headwind to new business
Limited scope for margin expansion
The latter point stems from the nature of XPS’s work, which is underpinned by pension scheme trustees’ need for stable and long-term support. Enjoying high client retention rates, advice is in ever-greater demand. In recent years, a toxic mix of low interest rates and rising scheme deficits has created a crisis in the pensions system. Simply put, it is getting harder for trustees and their corporate sponsors to match the expectations of scheme members, particularly for defined benefit plans. Most of these schemes have more than half a century of cash flows ahead of them, giving XPS decent top-line visibility.
Historic profitability is also strong. Over the last three years, the adjusted cash profit (Ebitda) margin has remained at, or above, 25 per cent, while the return on equity – a measure of business quality – has consistently come in at 13 per cent or higher.
There is an onus on revenue growth, which in recent years has been aided by acquisitions. XPS – then known as Xafinity – merged with Punter Southall in 2018 and purchased Royal London and Trigon in 2019.
Those acquisitions have pushed up net debt which, excluding lease liabilities, reached £56.1m last year, equivalent to two times adjusted cash profits. The group disclosed last week that its bank covenants have been relaxed, although chief financial officer Snehal Shah assured us this was a precautionary measure taken in March: “When we went into lockdown, we really didn’t know what the impact of Covid-19 might be”. While those covenant terms haven’t been disclosed, Mr Shah says XPS currently has plenty of headroom.
Initial fears of the pandemic’s impact on cash flows have also receded. Although client demand for discretionary services such as scheme website redesigns has softened, co-chief executive Paul Cuff says financial stresses have seen surging requests for additional support. While Covid-19 will likely see new business wins dip, the planned merger of two of the UK’s three largest pensions consultancies – Aon (US:AON) and Willis Towers Watson (US:WLTW) – is expected to lead to conflicts of interest, throwing off substantial potential mandates for big mid-tier operators such as XPS.
XPS PENSIONS (XPS) | |||||
ORD PRICE: | 115p | MARKET VALUE: | £234m | ||
TOUCH: | 114-116p | 12-MONTH HIGH: | 159p | LOW: | 96p |
FORWARD DIVIDEND YIELD: | 6.2% | FORWARD PE RATIO: | 11 | ||
NET ASSET VALUE: | 75p* | NET DEBT: | 45%** |
Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m)*** | Earnings per share (p)*** | Dividend per share (p) | |
2018 | 63 | 16.0 | 8.3 | 6.30 | |
2019 | 110 | 24.3 | 9.8 | 6.60 | |
2020 | 120 | 23.9 | 9.6 | 6.60 | |
2021*** | 126 | 25.4 | 9.9 | 6.70 | |
2022*** | 132 | 27.0 | 10.4 | 7.10 | |
% change | +5 | +6 | +5 | +6 | |
Beta: | 1.05 | ||||
*Includes intangible assets of £211m, or 104p a share | |||||
**Includes lease liabilities of £12.8m | |||||
***RBC forecasts, adjusted PTP and EPS figures |