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XPS Pensions Group

XPS Pensions Group 1H shows impact of PS deal

XPS Pensions Group (LON:XPS) interim results to 30 September 2018 are the maiden results for the combined group (Xafinity acquired businesses from Punter Southall Group in January 2018). In summary these results reveal:

Revenue rise by 113% to £47.5m, driven by the acquisition of the Punter Southall businesses: pro-form growth was 3.3%;
Adj operating profit increased 63% to £11.4m, as the EBIT margin on the Punter Southall Administration businesses is half that of Xafinity’s business;
Cash conversion was up marginally to 76% (1H18: 75%);
Net debt at period end was £47.5m (March 2018: £45.7m);
Adjusted diluted EPS rose 8% to 4.2p;
Interim DPS was increased 10% to 2.3p (1H18: 2.1p).

The outlook from the joint CEOs refers to “several large new clients and project wins occurring during H1 2019 … the successful integration of the two businesses … [and] … significant growth opportunities” The executive “remain confident as we move into H2 2019” and the “Board is confident that full year profit figures will be broadly in line with expectations.”

Zeus view: Management confirmed that the integration is progressing very well with high staff and client retention and high satisfaction and is on track to exit the Transitional Services Agreement by June 2019. While integration has distracted revenue generators, good integration is vitally important.
Management has indicated that underlying revenue growth in the Pensions business was most heavily impacted by the integration activities with Pensions Administration and Investment Consulting maintaining expected levels of growth. 1H revenue was split Pensions (53.5%), Pensions Administration (32.5%), Investment Consulting (7%) and Other (7%).Management has observed before that Pensions Consultancy tends to be seasonally more active in 2H of their final year. New client wins and known projects will benefit 2H19E. We have adjusted our forecasts to reflect the two small deals announced in September 2018: the purchase of Kier Pensions Unit and the sale of Healthcare Consulting Business. Overall, we leave our forecast adj PBT, Adj EPS and DPS unchanged for FY19E, FY20E and FY21E.

Valuation: At 165p XPS is trading on a prospective PER of 16.0x and 4.2% dividend yield. With prospects of double digit growth, arguably the quality of XPS’ earnings and growth support a PER of 20x and dividend yield of 3.3%.