JDC Group — White label solutions attract new clients

JDC Group posted a 12.5% y-o-y increase in revenues to €95m in FY18, which was broadly in line with the revised management guidance published in November and somewhat below earlier guidance of €100m. Growth was assisted by the strong rise in transaction volume on JDC’s platform, with a 30% increase in new contracts and the overall number of managed insurance contracts rising by 50% (or close to 650,000 contracts more than in the prior year). One of the main contributors to this growth was the agreement with Lufthansa’s subsidiary, Albatros, launched at the beginning of 2018 – even if the timing of client onboarding was somewhat behind initial assumptions, limiting top-line growth in FY18. The present net annual contribution of JDC’s insurance portfolio stands at more than €500m. Consequently, revenues in the Advisortech segment (where JDC’s platform business is reflected) rose by 15.5% to €76.9m in FY18. At the same time, the company’s Advisory segment recorded a minor 1.3% y-o-y decline in sales to €26.3m, with Q418 helping to compensate for the weaker Q318 when sales were down 15% y-o-y.

JDC’s adjusted EBITDA declined to €3.3m in FY18 from €3.9m in FY17 and was slightly below management guidance of €3.5–4.0m, while reported EBITDA stood at €1.5m vs €3.2m in FY17. This was due to JDC’s investments in IT and the transaction platform aimed at increasing efficiency and introducing additional automation solutions ahead of the onboarding of recently acquired clients (see below), with IT costs increasing by 40% y-o-y to €3.1m. Moreover, the company increased its headcount from 232 to 262 on average on a full-time equivalent basis, which resulted in a 14.8% y-o-y rise in personnel expenses to €16.6m. We understand that the latter is also a function of the high demand for software developers in the market translating into salary pressure. Earnings were also negatively affected by weaker stock market sentiment impacting on JDC’s investment products business (particularly in Q318, as discussed above). Major one-off items include the amortisation of acquired client portfolios and a one-off guarantee payment from the sale of an equity holding, as well as one-time expenses in connection with an established key client and the bancassurance business.

As a result, the FY18 net loss was €4.3m (vs a net loss of €1.7m in FY17). However, JDC’s equity ratio improved slightly to 39.0% at the end of FY18 from 37.2% at the end of FY17, assisted by the share issue in August last year (representing a cash injection of c €10m).

While we acknowledge that the FY18 results were down vs FY17 due to higher costs (on top of a weaker investment products business), we understand the need to further invest in JDC’s platform to accommodate recent large client wins. In particular, these include the cooperation with comdirect bank in the insurance business announced in October 2018. comdirect intends to expand its portfolio to include insurance products and will utilise JDC’s proprietary iCRM software to manage its client insurance portfolios. Another important client win is the partnership with Sparda Versicherungsservice (a subsidiary of Sparda Bank Baden-Württemberg), which will utilise JDC’s iCRM system as well as its white label web applications, allesmeins and GELD.de. comdirect and Sparda Bank represent customer bases of 2.4m and 0.7m, respectively. Moreover, JDC entered into a strategic cooperation with RheinLand Versicherungs AG in April 2019 to provide its IT services and back office support with respect to the distribution of pension products as part of a pilot project. The developments highlighted above follow some earlier large client wins, including Lufthansa’s subsidiary Albatros and BMW subsidiary Bavaria Wirtschaftsagentur.

We believe that this demonstrates JDC’s ability to successfully implement its digital business model and grow organically by attracting new, meaningful clients. Importantly, this is also in line with the company’s earlier intentions to attract German banks looking for a full-service provider executing the bancassurance model and generating additional revenues from cross-selling banking and insurance products. Ahead of new clients onboarding, JDC was able to release its new broker platform, iCRMweb, and also complete the white labelling of GELD.de (allesmeins was already white labelled), which will allow JDC to also offer customised solutions to comdirect and Sparda. The live cooperation with these clients should start by mid-2019. In terms of other projects, the company’s Initial Coin Offering (ICO) has been put on hold.

We await further updates on the potential acquisition of a direct competitor generating double-digit million revenues following JDC’s initial announcement in November 2018. Still, JDC has continued its market consolidation efforts with the acquisition of the investment pool KOMM Investment & Anlagevermittlungs in April 2019, which management expects will contribute c €5m to JDC’s revenues on an annualised basis at significant profitability. The transaction involves a broker of investment products rather than a player active in JDC’s key focus area (insurance products). However, JDC considered this a good opportunity to conduct a succession deal of a profitable ‘pen and paper’ business with solid recurring revenues, which will be further enhanced through the implementation of JDC’s digital solutions.

The German insurance industry is growing at a moderate, low-single digit rate, with gross premiums booked increasing by 2.1% y-o-y to €202.2bn in 2018 (as reported by the Gesamtverband der Deutschen Versicherungswirtschaft – GDV). This sector (in particular, the life insurance business) continues to be affected by the low interest rate environment currently weighing on investment income and demand for long-term pension products, as well as regulatory burdens. GDV expects gross premiums in the life insurance business to increase by c 1% in 2019. The potential changes to the life insurance regulations referred to as Lebensversicherungsreformgesetz II (LVRG II) may involve the introduction of a cap on fees earned on life insurance contracts and constrain new business. On the other hand, premiums in the German Property & Casualty business should rise by c 3% (according to GDV). That said, we appreciate JDC’s growing exposure to the bancassurance business, which we understand is growing ahead of other sales channels globally, especially when enhanced through digitalisation. The still low penetration rates of bancassurance products in the European banking sector (37% in life and 8% in non-life products, according to McKinsey) illustrate a solid market opportunity.

With respect to company guidance for FY19, management expects revenues to reach more than €110m (implying growth of more than 15% y-o-y), which is based on the already secured platform and outsourcing contracts (in particular Albatros) and these should generate relatively predictable revenues. Moreover, management anticipates a significant improvement in group EBITDA, which we understand will be a function of higher sales from new clients (economies of scale), the consolidation of KOMM Investment & Anlagevermittlungs, as well as the absence of investments which have burdened FY18 profitability (although further investments to expand the platform cannot be ruled out). JDC’s focus areas for 2019 include the acquisition of further key clients in order to scale the platform, as well as the optimisation of internal procedures and cost management initiatives. We understand that new insurance portfolios, which JDC could acquire (such as the one purchased from Assekuranz Herrmann in December 2017), are rather difficult to find at attractive prices at present. The new contracts with comdirect and Sparda should materially improve results in FY20, according to management.

From a limited number of close domestic peers, we have selected several companies that may be helpful in setting a context for JDC’s valuation although most address somewhat different markets and have different business models. In the independent financial advisors (IFAs) peer group we have included MLP as a direct competitor named by JDC’s management. JDC continues to trade at a considerable premium of c 97% on FY19e P/E, declining to 46% in FY20e, which may reflect market expectations of the ramp up in cooperation with major new clients.

From a valuation perspective, it is instructive to examine the recent change in shareholder structure. In March 2019, JDC announced that Great-West Lifeco Group, a leading financial service provider based in Canada, has become JDC’s largest shareholder after acquiring a 28% stake through several purchase agreements with the family offices of JDC’s founders, Ralph Konrad and Sebastian Grabmaier. It is important to note, that (as highlighted by the company in its FY18 report) the stake was acquired at a valuation that was ‘significantly above the current market value of JDC Group’.

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