JDC Group — Accelerating into H223

After three quarters of subdued year-on-year growth (Q123: 1.4%, Q422: -7.7% and Q322: 1.1%), Q223 signalled a return to a more substantial revenue growth level of 8%. For H123 this implies revenue growth of 4.5% to €84.6m. This increase is fully fuelled by JDC’s largest division, Advisortech (82% of revenues), which includes its insurance platform business. Revenue in this segment increased 11.2% to €75.0m with an acceleration in Q2 (+16.9%). Revenue from IFA clients, the independent financial advisers connected to JDC’s insurance platform, showed an increase in revenues of 9% in H1 to €63.5m, after a small decrease in Q123. This is the most important client group within JDC Group.

Revenues from major customers – savings bank and cooperative bank related insurers and in house insurance brokers from companies like Lufthansa, Volkswagen and BMW – increased 22% to €19.3m in H123, to almost 23% of JDC’s revenues. This percentage is gradually increasing. Within this group, the savings bank and cooperative bank related insurers in particular provide a large opportunity, as they have a massive client base in Germany.

The onboarding of Provinzial, the first savings bank-related insurer contract, to JDC’s platform is slow but on track, with 60 local banks onboarded and around 25 more to go this year. The transfer of insurance contracts to the platform, which generate turnover for JDC, is much faster at some branches than others. For example, Cologne (one million customers, balance sheet total €30bn) is the bank with the best adoption of the platform. This bank is responsible for the largest part of the revenues that saving banks will generate for JDC Group this year. As such it will take several years before the Provinzial contract will realise its full revenue potential.

The contract with savings bank-related insurance company VKB (Versicherungskammer Bayern) was signed on 16 August and the roll out of JDC’s platform to the savings banks in VKB’s business region is scheduled to start in Q124. The successful pilot with cooperative bank insurer R+V Versicherung has been continued and expanded to 20 branches, from four. Provinzial, VKB and R+V are all potential >€100m turnover clients for JDC Group, according to management.

JDC’s second division, Advisory (18% of revenues), is still performing at subdued levels with a decrease in revenues of 12.2% in H123, driven by the persistently difficult economic environment in Germany. This is reflected in the commissions on investments funds and shares/closed-end funds, which decreased 40.3% and 42.8%, respectively.

As a platform provider, JDC Group passes on the majority of the commission income generated on the platform to its platform clients. The percentage of received commissions through the platform passed on to JDC’s clients is decreasing slowly, from 73.7% in 2020 to 72.2% in H123, but in H123 it was 0.1% higher compared to H122. This reflects negatively on profitability levels.

Staff expenses were €14.0m, compared with €13.1m in H122, which largely explains the decrease in EBITDA to €5.1m from €5.4m in H122. Other operating costs were also higher. As a result of lower D&A, EBIT came in at more or less the same level as last year and net profit arrived was €1.6m, the same as last year.

More importantly, JDC reiterated its FY23 outlook on the basis of cooperation contracts already signed, of revenues of €175–190m and EBITDA of €11.5–13.0m.

JDC’s net debt at end H123 amounted to €1.6m (FY22: €3.0m). Interest-bearing liabilities of €19.7m (largely from its outstanding bond) are partly offset by a cash position of €18.1m. JDC also has 687k (FY22: 687k) of its own shares due to its buyback programmes, which provides a solid financial position.

At the midpoint, JDC’s FY23 guidance implies an acceleration of growth to 15.7% compared to H123 in terms of revenues in H2 and of 41.1% in EBITDA, as can be seen in Exhibit 2 below.

This guidance might seem challenging, but as we break down the revenue guidance, a relatively small improvement in revenues in Advisortech is necessary to reach the midpoint, while in Advisory a return to more usual levels of activity compared to the depressed levels of the last 12 months is required.

In Advisortech we expect an improvement in revenues of 13.8% in H223 compared to H123. This is a smaller improvement than we saw in 2021 (see below). CFO Ralph Konrad said in the conference call after the H123 results that the start of Q3 was strong with relatively high platform activity, which provides confidence that H223 will be better than H123. Q4 usually is by far the best quarter for this activity.

In Advisory we should see a return to more usual levels of activity (like H221), as the interest and inflationary environment seem likely to stabilise. We see an increase in revenues of 13.8% in this segment.

JDC Group’s business model incorporates a large amount of operating leverage and that should boost EBITDA, as revenue growth picks up in H223. JDC’s business is largely an electronic platform business with as little human interaction as possible and the higher levels of platform activity do not require much more operating expenses. We have pencilled in 11.9% higher operating expenses for the year on 16.8% higher revenues. As such, EBITDA will increase much faster than revenues. This should bring FY23 EBITDA well within the guided range.

We have made minor changes to our estimates after the H123 results. In the next few years, we continue to expect a further acceleration of growth in the Advisortech segment, driven not only by key clients, but also by increased growth in the IFA business. Furthermore, JDC is connecting more and more insurance brokers to its platform through the joint venture with Bain and JDC’s major shareholder GWL as well as the agency networks of insurance companies like Gothaer Versicherungen.

In FY23, we estimate that Advisortech revenues will increase by 20.7% to €160.3m, fuelled by a 25% increase at key clients and 20% in the IFA business, which will also benefit from a weak comparison base. In Advisory, we expect FY23 revenues to decrease by 2% to €34.0m, after an already weak FY22. With a recovery in H223 we expect revenue growth in Advisory to return to a more normalised level of 5% in the coming years.

Compared to our previous estimates, our revenue forecasts are more or less unchanged and our EBITDA forecasts are 1.1% lower in FY23 and 0.3% higher in FY24. We expect net profit to increase to €3.0m in FY23 and €6.9m in 2024, from €0.9m in 2022.

JDC Group passed the €1bn annual premium mark of insurance premium volume that passes through its platform in the last half year. CFO Ralph Konrad signalled that as an important development for the group. Due to its increasing size, JDC can negotiate more favourable terms for the commission it receives from insurance companies. Mr Konrad stated in the conference call after the results that for Property & Casualty business up to 500bp more commission could be possible in the long run, but in the medium term 200bp is more probable

These higher incoming commissions would probably partly end up at the platform clients, but also partly at JDC. In our estimates we have kept the paid out commission constant as a percentage of revenues, but this might prove to be too conservative if platform growth continues as planned.

An increase in commission received from insurance companies of 100bp, of which 50bp is passed on to platform partners, would translate into a 500bp decrease of commission paid out to platform partners. Compared to our current estimate of a stable 71% pay out, this would result in almost 5% EBITDA growth in 2025 according to our calculations.

Our DCF analysis results in a value of €34.09 per share, up from €32.51 in our April update note (published on 17 April 2023). This increase is the result of our higher estimates for 2024 and 2025. The most important assumptions in our DCF model are:

Compared to financial brokers like Aon and aggregators in the UK like Moneysupermarket.com, which we see as peers for JDC’s relatively small advisory business, JDC continues to trade at a premium on EV/EBITDA but at a steep discount on EV/sales for the next two years. Compared to earlier this year, the premium has widened somewhat.

JDC’s much bigger Advisortech activities are better comparable to the platforms of German mortgage specialist Hypoport, which also offers an insurance platform, and US-based platforms Goosehead Insurance and Lemonade. As Lemonade is not EBITDA positive in the coming years, it does not make sense to include it in our peer group.

Hypoport issued a profit warning in H123, driven by the lacklustre German mortgage market. However, its share price is still up 60% this year, which means that the premium to JDC Group both on EV/sales and EV/EBITDA in 2023e and 2024e has widened. Also, compared to Goosehead (share price +81% this year) Hypoport now trades at a premium. However, keep in mind that 2022 was a disastrous year for Hypoport’s share price (-80%).

Compared to the large share price movements of Goosehead and Hypoport this year, JDC’s share price has not performed very well, with a minor improvement (+1.4%). JDC’s discount on consensus FY24e EV/EBITDA now is 24.6%, which is relatively stable compared to our last report in April (26.4%). We do not see this large discount compared to platform peers as justified given the much more stable business model and large potential of JDC’s platform and its large client wins.