Zeus Capital Research Director Robin Savage caught up with DirectorsTalk for an exclusive interview to discuss Xafinity PLC (LON:XAF)
Q1: Xafinity, what does it do?
A1: Xafinity is a market-leading pensions consultancy, it provides advice and services to trustees of UK pension schemes and the companies which sponsor those pension schemes. You’ll know of its larger competitors, divisions of Marsh and McLennan, Aon Hewitt, Willis, Tower Watson and Jardine Lloyd Thompson, immediate peers are less well-known as many of them are partnerships. Xafinity will use its listing to enhance its key assets which are its professional staff and its brand and we expect Xafinity to thrive as a listed company.
Q2: Now, pensions is a subject that most people don’t like think about so what are the main points for investors to consider?
A2: For me, there are three points, firstly pensions are valuable long-term contracts, the second point is that pensions need to be de-risk and the third is that legislation may force change in the pensions market.
So, if we take the first one, the valuable long term contract. They provide high quality revenues to pension administrators and advisers and Xafinity has a well-diversified revenue stream from over 500 clients and over 80% of this revenue is reoccurring.
Second point, the need to de-risk these pensions. This is what service Xafinity provides and the majority of defined benefit pension schemes are highly sensitive to changes in economic variables such as changes in interest rates in financial markets, in expectations of inflation. Trustees and company directors need to listen to their pension consultancy firms that advise them and to make decisions to de-risk these schemes. Xafinity has a range of products and services which help these decision-makers and then Xafinity can carry out the de-risking services for them.
The third about the potential legislative change and regulatory change that may force change in the market and I see change as bringing opportunities for advisers. Xafinity is working on new products and services which meet the objectives set out in the government’s green paper that was published in February so I see a very exciting period for the next couple of years. In short, Xafinity is a very simple way to gain beneficial exposure to the pensions market and the changes in that market. Xafinity’s revenues are broadly time-based professional fees and 75% of its costs are staff costs so anything that increases the demand for pensions advice is positive for Xafinity.
Q3: Xafinity’s share price rose 11% on the first day of trading and then another 11% over the next 2 months, is there share price up with events?
A3: Well, at £1.71, which is roughly where it’s trading at the moment, Xafinity is trading on 18.5 times the fully diluted adjusted EPS for the year to 2018 and on a dividend yield of 3.62%. So, this valuation is in line with the FTSE All-Share yield which is 3.65% and what some people might consider to be a high price earnings multiple of 18.5 reflects the quality of Xafinity’s revenues.
The news of any new services that might increase Xafinity’s growth would justify an even higher price based on higher multiple of higher earnings, the higher multiple being a reflection of the potential higher growth. Preliminary results on the 28th June will be a good opportunity for Xafinity management to share any news of any new services that they have planned for launch and the impact of any of this is not in our forecast.
