Ready to scale up

JDC Group 15 May 2020 Update
Download PDF German PDF Download

JDC Group

Ready to scale up

Diversified financials

Scale research report - Update

14 May 2020

Price

€5.74

Market cap

€75m

Share price graph

Share details

Code

A8A

Listing

Deutsche Börse Scale

Shares in issue

13.1

Last reported net debt at end-2019

€10.4m

Business description

JDC Group is a financial services group providing advice and financial services, both directly to end-customers and via independent intermediaries. It operates one of the largest broker pools in Germany. The strategy is to focus on digital advice and administration capabilities to drive organic growth and position the group as market consolidator.

Bull

Strong position to support digital investment.

Encouraging new client wins.

Profitable consolidation opportunities.

Bear

Increased COVID-19-related uncertainty, affecting investment results.

Low interest rates and regulatory uncertainty affect the insurance industry.

IFA sector is forecast to shrink.

Analysts

Edwin de Jong

+44 (0) 20 3077 5700

Milosz Papst

+44 (0) 20 3077 5700

JDC Group is ready to scale up. Development costs for its bancassurance advisory, administration and service platform are stabilising, and last year it was successful in winning some large client contracts. These new contracts underpin consensus revenue growth forecasts for the next few years. As a platform with a recurring revenue base, JDC’s business model is not very vulnerable to the COVID-19 crisis. A valuation of 14.2x consensus FY20e EV/EBITDA does not seem demanding compared with international peers.

Strong results and solid outlook

JDC Group reported strong 2019 results. Revenue growth of 17% to €112m was slightly ahead of earlier guidance of €110m. Growth was largely driven by the Advisortech business, +20% to €92.3m, mainly due to the large Albatros contract and other clients. EBITDA almost tripled to €4.2m, partly helped by a positive €1m impact from IFRS 16, while the net loss narrowed to €1.8m from €4.3m in 2018. JDC Group guides to €125–132m revenues this year, based on existing contract wins, implying 12–18% growth. EBITDA will also increase further. If the effects of the COVID-19 crisis lead to a severe recession, or persistent volatility or negative developments on capital markets, it will have an impact. The platform itself is not dependent on supply chains or third-party vendors, so operational risks are limited.

Stabilising cost and new clients increase profitability

Where in the past an increasing portion of costs went into developing JDC’s platform, development costs began to stabilise in 2019, which could be positive for investors. The JDC business model is highly operationally geared, so signing new business/clients at limited extra cost should increase EBIT margins, given the platform is now in place. After the effect of the Albatros contract in 2019, 2020 should see additional service and management fees from recently announced large contracts. It can take some time before meaningful revenues come in, but JDC Group should be able to continue to win market share. The combination of higher revenues and a stabilising cost base means earnings growth should be strong.

Valuation: In line with peers on EV/EBITDA in FY20e

We have compiled a peer group of listed insurance brokers and aggregators. Compared to this group, JDC Group trades in line on EV/EBITDA in FY20e, while its growth profile has been much more attractive. It trades at a 21% discount on EV/EBITDA in FY21e.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/18

95.0

(2.9)

(0.34)

0.0

N/A

N/A

12/19

111.5

(1.8)

(0.14)

0.0

N/A

N/A

12/20e

122.4

0.7

0.07

0.0

N/A

N/A

12/21e

137.4

3.0

0.13

0.0

44.2

N/A

Source: Company accounts, Refinitiv consensus at 14 May 2020.

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Strong FY19 results and outlook

JDC Group reported revenue growth of 17% y-o-y to €112m, in line with the preliminary numbers released on 10 March and slightly ahead of earlier guidance of €110m. Growth in the Advisortech business, JDC Group’s B2B activities through broker pools and its bancassurance platform, increased by 20% y-o-y to €92.3m. The step-up was driven by the first full year consolidation of Albatros Versicherungsdienst (Lufthansa), but also by other new client wins. Revenue growth in the traditional Advisory business, the B2C part of the business in which JDC sells financial products directly to end-customers, amounted to 13.7% y-o-y, a strong increase from the 6.2% y-o-y growth reported in H119. According to the company, JDC Group significantly outgrew the German investment fund sector (+15% AUM) and insurance industry (+6.7% premium income), as well as much larger international peers like MMC, Aon, Moneysupermarket.com and Admiral.

EBITDA almost tripled to €4.2m, from €1.5m in 2018, partly helped by a positive €1m impact from IFRS 16. Advisortech reported €4.8m in EBITDA, Advisory €1.3m, while holding costs were €1.9m. The net loss narrowed to €1.8m from €4.3m in 2018.

Exhibit 1: FY19 results highlights

€'000s

FY19

FY18

y-o-y change

Total revenue

111,471

95,029

17%

Initial commission

75,118

62,891

19%

Insurance products

56,861

47,449

20%

Investment funds

13,587

10,890

25%

Shares/Closed-end funds

4,670

4,552

3%

Follow-up commission

20,223

17,331

17%

Overrides

6,649

6,490

2%

Services

3,405

2,739

24%

Fee-based advisory

3,091

2,851

8%

Other income

2,985

2,727

9%

Capitalised services

998

741

35%

Other operating income

617

1,056

-42%

Commission expenses

(81,433)

(67,280)

21%

Commission expense as % of revenues

73%

71%

225bp

Personnel expenses

(17,417)

(16,534)

5%

Other operating expenses

(10,070)

(11,504)

12%

EBITDA

4,166

1,508

176%

D&A

(4,311)

(3,110)

39%

EBIT

(145)

(1,602)

91%

Pre-tax profit

(1,753)

(2,874)

39%

Net income

(1,813)

(4,266)

N/M

EPS (€)

(0.14)

(0.34)

N/M

Source: JDC Group accounts

If the effects of the COVID-19 crisis lead to a severe recession, it could of course also have an impact on the development of JDC Group’s business, as there will be less demand for insurance policies and bank products in general. In addition, persistent volatility or negative developments in capital markets could affect JDC Group’s profitability, as some fees are dependent on development of the values of underlying investment portfolios. However, JDC Group remains positive on 2020 and has sufficient liquidity, especially after the €25m bond placement in November last year. As a digitalisation platform, the company is not dependent on supply chains or third-party vendors.

Moreover, based on a mix of co-operation agreements already completed, like the recently announced service contracts for Boehringer Ingelheim Secura and InsureDirect24 (Nürnberger Versicherungsgruppe), as well as the contract wins from last year, JDC Group expects revenue to increase to €125–132m in 2020. This implies 12–18% growth this year. EBITDA will also increase further, with the EBITDA margin likely to rise if JDC can monetise economies of scale and the recently introduced efficiencies.

Large contracts continue to come in

After the effect of the Albatros contract on 2019 revenues, 2020 should see the benefits of the recently announced large insurance, banking and broker service and administration contracts. In 2019, JDC Group won contracts with the insurance broker of BMW (Bavaria Wirtschaftsagentur) and Rheinland Versicherung, which will also contribute to revenues. Furthermore, JDC completed its first, major long-term client agreements’ with Sparda-Bank, Comdirect Bank and Volkswagen Bank, followed this year by the broker business of Boehringer Ingelheim and the direct sales agent of Nürnberger Versicherung.

As such, there appears to be strong momentum in connecting new client pools to the management and administration platform for investment and insurance portfolios, which could be seen as a positive development. However, it can take some time for meaningful revenues to come through after signing contracts (remember the Albatros contract was signed in November 2017). This can be caused by operational issues like the time it takes to physically connect networks and to transfer portfolios to the platform. Nevertheless, we would expect JDC Group to continue to grow faster than peers which do not have such a scalable platform.

Platform costs are stabilising

Where in the past a large portion of costs went into developing JDC’s platform, development costs have now stabilised as IT platform development has been completed. We believe that is a major positive. As a result, the operational gearing of the business model should now become visible as margins grow faster than revenues. The flexibility and modularity of the white-label product range mean JDC can deploy interfaces at its clients quickly, as it is a plug and play solution.

More than €40m has been invested in this platform in the last six to seven years and it is now is one of the largest management and administration platforms for investment and insurance portfolios in Europe. This investment also creates an extra barrier to entry, which is already high given the regulatory environment and IT requirements (eg security, connectivity etc).

The combined effect of large new contracts and a stabilising cost base means that earnings growth in the coming years should be strong.

Valuation

Finding relevant listed peers for JDC Group is difficult. In the Advisortech division, it competes as a broker pool with companies offering financial products such as investment funds, closed funds, insurance and financing products through independent brokers to downstream brokers or end-clients. In Germany these are private companies like Fonds Finanz Maklerservice and BCA, as well as commercial banks.

Looking at local listed companies that have their own platform, we have selected Netfonds and Hypoport. We also consider that much larger international insurance brokers like MMC, AON, Willis Towers Watson and aggregators in the UK like Admiral and Moneysupermarket.com, are the most relevant comparisons.

In Advisory, JDC Group focuses on the mass affluent market mostly for wealth accumulation or protection, and competes with commercial and private banks and financial advisory companies like MLP and Horbach.

We have compiled a group of listed insurance brokers and aggregators. JDC Group trades in line with this group on EV/EBITDA 2020e, while its growth profile has been much more attractive over the last few years. This is also reflected in a much higher discount on 21% EV/EBITDA in 2021e.

Although JDC Group is not yet profitable on a net profit level and pays out no dividend, it has initiated a share buyback programme in July last year. Up to 27 April 2020 it had bought back over 0.4m shares of the up to 5% (or 0.7m shares) shares that it intended to purchase. The shares that were purchased are kept in treasury.

Exhibit 2: Peer group comparison

Market cap

EV/EBITDA (x)

EV/Sales (x)

(m)

2020e

2021e

2020e

2021e

MMC

50,045

14.3

13.1

3.6

3.4

Aon

40,957

12.6

11.8

3.8

3.7

Willis Towers Watson

23,641

11.8

11.3

3.1

2.9

Admiral

7,430

14.4

15.1

8.0

6.9

Moneysupermarket.com

1,740

12.8

11.6

4.5

4.2

MLP

505

25.6

23.5

2.8

2.6

AFH

127

6.4

5.6

1.5

1.4

Netfonds

50

20.9

16.7

0.5

0.4

Hypoport

2,260

44.1

34.7

6.1

5.1

Peer group average

14.3

13.1

3.6

3.4

JDC Group

76

14.2

10.4

0.7

0.6

Premium/(discount) to peer group

0%

(21%)

(81%)

(82%)

Source: Refinitiv consensus at 8 May 2020.

General disclaimer and copyright

Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Share this with friends and colleagues