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: You’ve published a research note on Xafinity following its acquisition of Punter Southall Holdings, can you remind us who they are and what do they do?
A1: Xafinity is, or was, the 9th largest pensions actuarial, investment and administration business in the UK and after their acquisition of Punter Southall which was the 11th, the combined group is now the 5th largest UK pensions, actuarial, investment and administration business. The transaction has doubled their market share and placed it in an excellent position to grow.
Q2: So, the acquisition will double the number of the firm’s clients, its staff and the revenues to over £100 million, what impact will the acquisition have on the Earnings Per Share?
A2: Well first of all, the company’s year end is 31st March, so the transaction will have no material impact on the adjusted EPS to 31 March 2018. We forecast the acquisition will enhance their adjusted EPS for the year to 31 March 2019 by 5% to 10.2p and there are incentives for Punter Southall management that have been acquired which are consistent with an adjusted EPS rising to 10.9p for that year. For the year to 31st March 2020, we expect the transaction will increase their adjusted EPS by over 10% so our number is just 10% up which is 11.8p compared to the number we had previously expected at IPO.
Q3: Shares have performed well since its IPO in February 2017, being up some 30% compared to the FT All Share which is broadly unchanged. In current volatile markets, why should investors seek to invest in a company like Xafinity?
A3: They are a remarkable company in that it is a defensive growth company. When I say defensive growth, it is growing, it’s growing at a steady rate and the underlying operations that it provides, there is a definite growth market. It’s defensive in the way in which it raises its revenues, it has long-term client relationships and these relationships are extremely sticky, the revenues are based on time and materials so in a professional services revenue. The underlying client need is actually increased during volatile markets so week’s like these when the XE markets are volatile, where there are big questions over what long-term interests are, these are precisely the environments where there is greatest uncertainty about whether or not pension funds are property-valued, whether they’ve got deficiencies and that’s where the consultancy side of XAF comes into play.
We are confident in the quality of the company’s revenue stream and in the management’s ability to successfully integrate Punter Southall. Normally, an acquisition, you may have some concerns but in this particular case, we are confident because their senior executives started their professional careers at Punter Southall and therefore, there is a very similar culture.
So, in terms of valuation, at £1.80 a share, they are trading on just over 17 times on 2019 adjusted EPS and generating a dividend yield which is over 3.8% so an attractive yield with growth potential even in difficult markets. This is a quality yield, there’s a potential 7% growth coming through this period if the management team are able to hit their March 2019 earn out target. Now, obviously we would like that to happen, we can’t be absolutely certain.
Looking further ahead, we see the potential for Xafinity to further consolidate the mid-market actuarial sector, it is easy, for me, to imagine them with over £200 million of revenue after another transaction.