Review of investment case

XPS Pensions Group

Using reported results for XPS Pensions Group (LON:XPS) published in June, we have calculated proforma revenues, profit and adj EPS assuming Punter Southall had been included for the full year to March 2018. Key points are:

Total proforma revenue for the year of £106.0m includes a £51.5m contribution from Xafinity (excluding HR Trustees which was sold) and £54.5m contribution from Punter Southall (post acquisition actual reported: £12.8m);

Proforma EBIT margin of 24.2% reflects a full year of Pension Admin which has lower margin and includes the positive impact of the TSA agreement, with 28.5% EBIT margin from Xafinity and 20.0% EBIT margin from the Punter Southall businesses.

Proforma adj diluted EPS of 9.3p based on proforma PAT of £19.2m and 206m shares (N.B. reported adj EPS using only post acquisition profits and the average shares in issue is co-incidentally also 9.3p a share).

Using these Proforma results, we expect the current year to show:

6.6% revenue growth to £113.0m for FY(Mar)2019;

Staff costs to rise 10.0% to £59.2m, as management invests in core platform and prepares for the exit of the Transition Services Agreement (TSA) in 2019;

The TSA costs £1.6m, which is c. £1.4m below the cost of obtaining these services without the constraints of the TSA;

11% growth in adj diluted EPS from 9.3p to 10.3p a share, with over 10% growth in each of the following two years.

In recent months, XPS has won numerous large mandates which should contribute to revenue later this year. The purchase of Jardine Lloyd Thompson by Marsh McLennan (one of the top 3 Global Insurance Brokers & Pensions Consultancies), strengthens XPS’ position as the leading UK mid-tier Pensions Consultancy.

Zeus view: XPS has good momentum: the combined business winning new contracts in competition with smaller mid-market firms and its larger peers. Our proforma analysis supports our view for potential for c 11% annual EPS growth.

On 18 September 2018, XPS announced two small deals: the purchase of Kier Pensions Unit and the sale of Healthcare Consulting Business. We will include these transactions once completion has occurred, which may be around the time XPS is due to report interims on Thursday 29 November.

Valuation: At 167p XPS pnsions is trading on a prospective PER of 16.2x and 4.1% dividend yield. With prospects of double digit growth, arguably the quality of XPS’ earnings and growth supports a PER of 20x and dividend yield of 3.3%.

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