Analyst Q&A with Zeus Capital: JTC Group (LON:JTC)

Robin Savage

JTC Group (LON:JTC) is the topic of conversation when Zeus Capital’s Research Director Robin Savage caught up with DirectorsTalk for an exclusive interview.

Q1: This morning JTC Group released its year-end trading update, what were the key points from that update?

A1: The trading update confirms that the full year results, which will be reported on 1st April, will show revenue was within the range of analyst expectations with organic growth within the 8-10% company guidance. The adjusted EBITDA was also in line with consensus expectations with a further year-on-year improvement in EBITDA margin.

In addition, the update revealed:

  • New business increased to £14.9 million, a year ago the business was just under £10 million so a 50% increase in new business generation
  • The deal they did last March, Exequtive Partners, has integrated well which is good news
  • Increase their banking facilities by £50 million from £100 million to £150 million.

The outlook commentary is positive, all divisions performing well and the focus has been on client service excellence, winning new business and selective M&A, although to be clear, trying to find the right bolt-on acquisitions.

Q2: How does their trading update meet with your forecasts and expectations?

A2: The new business generation of £14.9 million is higher than I had expected, I’d expected £12.4 million so that is clearly positive. The new business wins contribute to next year’s revenue rather than current year revenue so we make no change to our forecasts at the moment. Obviously, when we have the full disclosure of the reporting accounts, we can have a look at 2020 and 2021 forecasts.

The £50 million increase in the banking facilities to £150 million, I think, is significant. Obviously, our forecasts do not include potential acquisitions, we only reflect acquisitions when they occur so we have made no changes to our forecasts. They haven’t increased those banking facilities to fun, they’ve done it because they’re looking to do a deal and they need the banking facility to do that.

Q3: JTC Group shares at 425p are trading on 20x times consensus earnings for 2019, what thoughts do you have on fair value?

A3: We’ve, first of all, observed that the company generates high quality recurring revenues, and these are organically growing at 8% to 10% per annum so it’s a good starting point in terms of high quality, cash generation which the XE market will typically value quite highly.

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The benefits of scale enable JTC to deliver slightly higher levels of organic earnings growth and this, in my view, justifies the current share price so essentially a double-digits earnings growth deserves to trade on something like 20 times most recently reported numbers, may be even 20 times current year, 2020. So, at the moment, it’s trading on 18 times so arguably there is room, once confidence has been built into the 2020 forecasts, for the shares to trade up from 18 times to 20 times.

In addition, investors can expect acquisition growth and that’s really what we were talking about a moment ago in terms of increased debt facility, the ability for the business to actually make acquisitions which should be earnings enhancing.

The trust and corporate services market, in which JTC operates, is very fragmented, it’s a people business , typically professional qualified people working within the Group. If they make acquisitions then they can add those individuals to the front and use the company’s platform of compliance and administration around the world to deliver growth to shareholders.

The acquisitions will potentially add materially to earnings growth in 2020 and 2021 and beyond.

JTC’s peer, Sanne, trades on over 25 times historic adjusted EPS and 22 times 2020 forecast so it’s trading at a premium to JTC so arguably, there is potential for an increase in valuation multiple as well as the growth coming through. For JTC, the management have got a high level of share ownership and they’re cautious about overpaying.

In 2018, the company invested £49 million in two deals, last year it invested £22 million in just 1 business and this year, 2020, as I mentioned earlier, Ithink they will make a substantial acquisition.

So, in summary, investors buying JTC shares at 425p may look forward to double-digit earnings growth and, in addition to that, benefits from acquisitions that take place and potentially an improvement in the rating from where they are at the moment to where Sanne is.

Essentially, I think the company is fairly valued for what it is which is why the shares are where they are but there is potential coming through from confidence in the earnings growth, benefits from acquisitions and a consequential improvement in the investment rating.

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