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XPS Pensions Group plc

Xafinity Plc Initiation of Coverage – Corporate pension consultancy

Xafinity plc (LON:XAF) 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.

Stable and predictable core business. Revenues are highly predictable, non-cyclical and recurring from “open-ended” contracts with clients, and typically charged on a time and expenses or fixed fee basis. Xafinity’s client base is long standing, and highly diversified with high levels of retention.

Beneficiary of regulatory change. This tends to be frequent and stimulates client demand for services. Xafinity’s recurring revenues have grown by around 6% p.a. over last 3 years and regulatory change has helped drive historic performance.

Increasing market in proactively de-risking pension schemes. We expect activity to increase materially in coming years; a survey suggests that the number of de-risking projects performed in future may be many multiples of the number performed in the last decade and Xafinity has developed innovative solutions e.g. Xafinity Insure (a buy-in/buy-out tool) and a trivial commutation “centre of excellence” which assists clients with de-risking.

Well placed to develop new business. Xafinity has invested in recruiting a strong management team and has developed products to target new clients for both its core business and de-risking projects. This investment is paying off with recent new client wins in a diverse range of areas and a strong pipeline.

Developed strategy for Defined Contribution market. Its DC Master Trust, National Pension Trust (NPT), enables employers to provide members with access to pension flexibility (“Freedom and Choice”). NPT is tech-enabled, growing quickly, with operational gearing, and has potential to grow annuity type AUM revenue.

Revenues and costs well managed. Revenues are directly linked to work carried out by its over 400 staff (including over 100 actuarial staff) and in accordance with agreed work schedules (typically complex). Staff costs make up c.75% of total with staff costs:revenue ratio below c.50%. Good time-management delivers predictable EBITDA margin of over 30%.

High pay-out ratio. Regulatory risk and capital requirements are low, enabling Xafinity to pay out two thirds of its earnings as dividends.

Xafinity plc has the potential to provide attractive dividend yield and growth. 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. Once listed there is also the potential for its rating to reflect the quality of Xafinity’s earnings and dividend stream.

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