The combination of Xafinity Plc (LON:XAF) and the pensions actuarial, investment and administration business of Punter Southall, creates the largest “pure-play” pensions consultancy in UK.
Xafinity is a market leader in providing pension compliance and advisory services to trustees and sponsors of UK corporate pension schemes. We see its earnings as high quality and dividend paying capability as outstanding given the cash generative nature of its business. This acquisition doubles Xafinity’s market share, removes potential conflict (through the disposal of HR Trustees, which is now shown as discontinued) and makes it the largest UK “pure play” pensions consultancy, which should benefit from fall-out from the “mega-brokers”.
The acquisition enhances Xafinity’s key attractions:
1 Stable and predictable core business. The enlarged group now has 1,000 corporate clients to whom it provides administration and consulting services.
2 Beneficiary of regulatory change: the CMA is investigating the market for investment consultancy and fiduciary management, where the “mega-brokers” have c. 67% market share. We expect the enlarged Xafinity group, which is the largest alternative to the mega-brokers, will gain market share over time.
3 Increasing market for proactively de-risking pension schemes: the enlarged group has a wider source of introductions to new de-risking schemes.
4 Well placed to develop new business: the acquisition has not only widened and deepened its network of corporate relationships, but also increased the group’s capacity to service new and larger clients.
5 Revenues and costs are well managed: the integration provides an opportunity for management to invest in its senior people, processes and procedures.
6 High pay-out ratio: the enlarged group will maintain 1.5x dividend cover.
Zeus Capital forecast for Xafinity Plc’s FY(Mar) 19E revenues is £111m, which implies 3.3% underlying growth during the year of integration. This is consistent with the Board’s view that “the acquisition will be earnings enhancing for the Group for the year ending 31 March 2019 and materially earnings enhancing thereafter.”
Our analysis (pages 2 & 7) shows the positive impact of the company reaching earnout targets of £113m to £116m. We believe our forecasts are appropriately prudent. At 182p XAF’s rating reflects the quality of its earnings and dividend stream. The earnout target range suggests that there is scope for 4.7% additional revenue growth, which we estimate would lift our FY19E EPS 6.8% to 10.9p, putting Xafinity on a FY(Mar) 19E PER of 16.7x.
