Xafinity PLC Q&A with Zeus Capital’s Research Director Robin Savage (LON:XAF)

XPS Pensions Group plc

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

 

Q1: The CMA announced that it would investigate investment consultancy and fiduciary management services. Why has Xafinity, the listed pension consultancy, welcomed this investigation and what are the potential consequences?

A1: First of all, the company is a market leading pensions consultancy, it provides advice and services to trustees of UK pension schemes and companies which sponsor these pension schemes. One of the services they provide is investment consultancy, in short, that is providing a report to the trustees or to the sponsors of a scheme about the performance of the investment managers and whether or not they actually have kept to the mandate.

You will know of its larger competitors, Marsh McLennan, Aon Hewit, Willis Towers Watson and Jardine Lloyd Thompson, collectively these firms’ market share of the pension consultancy market is around about 50%. So, the four large competitors have 50% of the market and a very large number of smaller players have the rest and XAF is one of the larger of the mid-markets and it has a 3% market share.

So, the Financial Conduct Authority, the FCA, carried out a market study earlier this year and found that there were issues within this market. They found there were signs that the buyers of investment consultancy may not be best placed to judge the quality or the value for money of the services they receive and they found evidence of the biggest firms holding a large share of the market, as I’ve just said. They also found barriers to expansion restricting smaller, newer consultants from developing their business and they found potential conflicts of interest relating to the other services offered by a number of firms, particularly the large fiduciary management firms.

In short, the CMA, the Companies and Marketing Authority, is going to gather a large amount of information and engage with key participants to find a potential remedy to the concerns that the FCA have identified. Xafinity is working on a potential remedy which, in our opinion, will result in improved outcomes and market share moving from the larger player to XAF.

 

Q2. So, when will we know more about the potential remedy and potential impact?

A2: Well, the CMA investigation will conclude by March 2019, or at least that is what they say at the moment. There is unlikely to be any material change to the investment consultancy or fiduciary management markets in the next two years because these are extremely valuable services and until they are forced to move business away from themselves, they will keep it. I think the benefits to the company and to other mid-market players is likely to arise from 2020 and beyond.

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Q3. The share price is at about 166p, it’s up 22% since its IPO at 139p, is now a good time to invest?

A3: Xafinity PLC floated in February 2017, its year-end is the end of March, it has reported its results to March, reported at the end of June so we are now approaching the end of the first half of its first year on the public markets. At 166p, they are trading on 18.4 times fully diluted adjusted EPS for the year that we are currently in, the year to March 2018 and on a 3.6% dividend yield. This valuation reflects the quality of their revenues but, in my opinion, does not reflect their growth potential. Over the past 6 months there have been 24 million shares traded at a volume weighted average price of 165p so I think, factually, you could say 166p seems a reasonable price given the trading that’s taken place over the last few months.

We expect the interim results to September to be published in December and I think given the structure of the business, this is the time, this is the event every year which will prompt analysts to review their forecasts for the year to March 2018 and prospects for the following year or two.
The reason for that is that they have a well-established client base, there’s a very high level of repeatable income so it’s quite a predictable company but if there are new clients which have come, if there are new streams of revenue which are being added, I think they are quite likely to be identified at the interim stage.

Therefore, that’s really the time when forecasts will be changed whereas at the end of the financial year, I suspect that the next financial year will be so far away, three quarters of the year away, that the temptation will be to leave the forecasts where they are. So, I suspect that you’ll see the interims is a very good time for forecasts to be adjusted for the company.

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