Xafinity Plc Supportive of referral to CMA

XPS Pensions Group plc

What’s new
Yesterday Xafinity Plc (LON:XAF) and Markets Authority, “CMA”, launched a market investigation into investment consultancy and fiduciary management services.

Yesterday, Xafinity’s Head of Pension Investment commented: “[Xafinity] fully support[s] the announcement from the FCA today to refer investment consultants to the CMA.”

Xafinity, in its response to the FCA’s consultation, published on 28 July 2017, stated that it “share[d] the concerns of the FCA regarding investment consultancy and the market for fiduciary management. There is a concentrated market which is characterised by low switching and inherent conflicts of interest. A full review will likely lead to better outcomes for schemes and ultimately members”.

The CMA bulletin (see page 2) summarises the reasons for the investigation, an outline of investigatory process and CMA’s intention to conclude its investigation by March 2019.

Zeus view
We expect XAF to gain market share from the CMA’s investigation into investment consultancy and fiduciary management services. The biggest investment consultancy firms are likely to lose market share to mid-tier firms.

The increase in Xafinity’s market share will occur over time and probably after the investigation concludes in 2019. This benefit is not in our forecasts.

XAF management set out its views on the potential conflicts of interest in its response to the FCA (see page 4) and in its press releases (page 3). Xafinity’s clients and investors should be reassured that management is working on solutions “for the good of pension schemes, trustees and clients”.

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 Plc as a core holding with both growth and dividend attractions. Since its IPO company shares have risen 22%; the 18.4x FY(Mar)18e PER multiple reflects the quality of company earnings and dividend stream.

If Xafinity grows its revenue stream through additional Investment Consultancy work, it may trade even higher

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