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XPS Pensions Group plc

Xafinity Plc A core holding with both growth and dividend attractions – Zeus Capital

This week, Xafinity Plc (LON:XAF) formally launched “DB Sense”, a “complete solution for small Defined Benefit pension schemes”, which could save an “average” £25m DB scheme £137,500 per annum.

Xafinity will provide full actuarial, admin and investment services to the DB schemes, each of which will have a sole trustee. The improved governance, advisory, administration and investment structure will result in better outcomes and lower costs. . Cost savings will arise from economies of scale and the agreement Xafinity has reached with LGIM, which will set charges at levels normally charged to schemes with over £0.5 billion of assets.

Xafinity will take DB Sense to market through a telesales campaign. A brochure outlining DB Sense is available on the Xafinity website.

Zeus view

DB Sense is a response to DWP Pensions Green Paper in February 2017 and the Pensions and Life Savings Association report in October 2016, which said small DB schemes suffer from poor governance and high fund charges.

With over 800 BD schemes in the target market, we estimate that the total potential savings for these DB schemes exceeds £100m pa; that the total potential charges by LGIM and Xafinity on the total pool might exceed £150m pa and the total potential fees excluding investment management might exceed £50m pa. The inertia, which accompanies pension fund decision making, may result in DB Sense adding to Xafinity’s new business wins over many years.

We expect management guidance on the accounting at the full year results meeting on 28 June.

We expect new legislation to drive regulatory change, which will increase the need for consulting advice and new solutions. We will revise our forecasts for Xafinity when there is evidence of an increase in clients and revenue stream.

Valuation

Combination of 6% revenue growth, benefits of scale, a 1.5x cover dividend policy and attractive yield should deliver strong returns. We see Xafinity as a core holding with both growth and dividend attractions. Since its IPO Xafinity shares have risen 24%; the 18.5x FY(Mar)18e PER multiple reflects the quality of Xafinity’s earnings and dividend stream.

If Xafinity Plc grows its revenue stream through attracting new clients using initiatives like DB Sense, it may trade even higher.

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