JDC Group — Adding more client groups

JDC’s key asset is its highly scalable Advisortech insurance platform, which enables private clients to manage insurance portfolios from hundreds of German insurance companies. This technology platform, in which JDC invested more than €40m to develop, was initially built for its own broker pool business, Jung, DMS & Cie, and the financial advisory business FiNUM, but at a later stage JDC decided to exploit it commercially.

The platform can be sold either as a white-label product with the client’s look and feel or as a separate service. Examples are www.finanzapp.allesmeins.de (Exhibit 1) and the direct customer platform www.geld.de. Through the platform, private individuals/intermediaries can select, add and service insurance policies from almost all insurers active on the German market, using a simple app that also provides a comprehensive overview of an individual’s insurance portfolio.

JDC’s corporate clients can use the app’s functionality for their clients. JDC operates the front end and back end of the contracts and the client-facing side of the app. The earnings model is very simple, adding clients to the platform and generating commissions through selling and transferring insurance policies.

Clients that have large private client portfolios, such as banks, corporate brokers or the exclusive sales networks of insurance groups, are the easiest way to generate traffic on the platform and income for JDC. JDC receives part of the commission (typically c 25%, see Exhibit 2) its clients generate for offering the platform and contract handling. JDC thereby operates a B2B2C platform.

JDC has been very successful in adding new client groups to its platform (see Exhibit 3 below). In addition to in-house insurance brokers from Lufthansa (Albatros) and BMW, JDC has contracts with Provinzial and VKB, insurance companies from large savings banks, as well as internet platform Finanzguru and agency networks of insurers such as Gothaer.

We see the recently announced JV with Bain and 27% shareholder GWL as yet another opportunity for platform growth. JDC can co-invest in the JV with Bain/GWL, to acquire larger insurance brokers in Germany and Austria (brokers with €1m+ in revenues). The acquired brokers will consequently be plugged into JDC’s platform through service agreements, adding both platform growth and part of the generated earnings by the acquired broker.

Bain made a similar deal in the United States with KAS in Q120. KAS has already acquired $110m in annual revenues through 11 acquisitions. We therefore believe that this transaction could add a single-digit million-euro EBIT contribution to JDC’s earnings after a few years. The advantage compared to the other large clients is that as a (co) owner JDC has much more leverage transferring contracts quickly to its own platform.

Nevertheless, we have not included this deal in our estimates, as the timing of the acquisition of brokers is highly uncertain.

JDC has shown remarkable success in adding new client groups and we believe it will continue to do so. German mortgage platform Hypoport is making inroads into the insurtech space with a B2C model, but so far JDC has beaten it in the race for large clients. The pilot with cooperative bank insurer R+V Versicherung (30 million clients) could result in a new large contract. Other new large clients could be additional savings banks using the S-Versicherungsmanager app, for example VGH Versicherungen, or agent networks from insurance companies and of course more individual brokers of all sizes. The transfer of client contracts to JDC’s platform is now key. At this point, JDC can transfer c 330k contracts on an annual basis, of which c 120k are new customers. Operationally, JDC has been able to add high volumes to its platform without needing to hire many extra staff, which has not been a bottleneck so far. While the largest part of the operation is digital, employees are still needed to verify accounts and for help desks. Thus, operational capacity could be a limitation.

Within Advisortech, JDC’s most important business, representing more than 80% of revenues, the key component is the independent financial advisory (IFA) business. This includes commissions earned by independent advisories using JDC’s platform. On average, there has been double-digit growth in this part of the business in the last few years and the outlook continues to be strong. JDC’s platform is gaining adoption and traction, and competition from platforms like Hypoport is diminishing. As a result, we continue to expect double-digit growth in this part of business.

Higher revenue momentum should come from the large clients JDC has won in the last few years (see Exhibit 4). The darker green areas indicate that the contract is running according to plan, while the lighter green areas indicate either the start of a contract or a quiet period (mostly driven by COVID).

We expect key clients to deliver €51.7m in revenues by 2024, well over 20% of our forecast total revenues, and that proportion will grow further. In particular, the large insurance platform contracts won from the German savings banks-related insurance businesses Provinzial and VKB have strong revenue growth potential. However traditional banks are slow to adopt a new insurance platform, which makes the runway of increasing revenues more gradual Also, adoption rates between savings banks can vary greatly.

Next to Advisortech, JDC has its own advisory business, FiNUM. The origin of this business segment results from the acquisition of three smaller advisory businesses next to the existing broker pool between 2009 and 2011. We have pencilled in 5% growth in this business, driven by limited volume growth and an increasing price component.

As a check, we have also modelled initial commissions (commission when an insurance policy is transferred to the platform) and follow-up commissions (commission on retained insurance policies). We estimate 20% growth in initial commissions in the next few years and 14% growth in follow-up commissions in 2022, increasing towards 18% by 2024. Other fee income (services/fee-based advisory/overrides) are assumed to be stable in our model.

JDC pays the majority of the commissions earned to the parties that close the transaction through its platform (unless it is JDC’s own advisory business). For the larger contracts that have been closed, clients have negotiated a larger proportion of the commission pie and that is the reason why gross profit margins are expected to decrease (from 28.4% in 2021 to 25.0% in 2024e). We expect the commission paid out to clients to increase to 76% of total commission income by 2024 from 72.9% in 2021 (see Exhibit 5).

As a platform business, JDC’s cost base is relatively stable. We have pencilled in 6% higher staffing costs in 2022, driven by higher pay rates and an increase in staff to assist the growth in transferring insurance contracts to JDC’s platform. While most of the operation is digital and so can be scaled up easily, employees are still needed to verify accounts and for help desks. JDC has offices in areas in Germany where the wages are lower.

Other operating expenses are expected to grow by 2–3% in the next few years, driven by cost control. As a result, we forecast that EBITDA will more than double between 2021 and 2024 to €19.8m. Although we forecast 17% revenue growth in both FY23 and FY24, we expect EBITDA margins to expand to 8.5% in 2024 (from 5.7% in 2021).

We see D&A increasing by 5–10% per year and assume that interest remains stable (the majority is interest on a bond). JDC’s corporate tax rate will be 15–20% (we have assumed 20%) in the next few years, as it has deferred tax assets of €3.1m. We therefore forecast that net profit will increase to €9.1m by 2024 from €0.9m in 2021.

JDC has guided to revenues of €165–175m in FY22 or +16% at the midpoint versus 2021 and EBITDA of more than €11m, compared to €8.4m in FY21. This seems slightly conservative given the 20% increase in Q1, and our forecasts are at the higher end of revenue guidance and slightly higher on EBITDA. The deteriorating macro environment is likely to drive consumers to household savings; insurance could be an obvious source of savings and JDC’s platform helps with that.

JDC expects revenue growth to accelerate to more than 20% in 2023 from its large contracts. Over the longer term, by 2025, JDC targets a doubling in revenues to €246m by 2025 and a ‘multi-fold’ increase in EBITDA compared to 2020. These longer-term targets seem achievable given the client wins that have been reported so far.

In 2019, JDC’s Jung, DMS & Cie unit issued a bond of €19.5m carrying coupon interest of 5.5% and maturity to 2024. In addition, JDC has a short-term bank loan of €1m. In FY20, there was a small net debt position, but in 2021 JDC issued €10.6m in equity in relation to the deal closed with VKB, which also included a share of JDC. This cash inflow was partly offset by the acquisition of independent data analysis and software development company Morgen & Morgen. All in all, JDC had a net cash position of €1.4m at the end of FY21. Cash and cash equivalents were €21.9m.

Part of the cash on the balance sheet will be used for a share buyback programme up to a maximum of 200k shares or €5m, which was initiated on 14 June 2022. Up to 8 July, more than 17k shares have been bought back at prices between €18.17 and €19.80. JDC has held its own shares in treasury for a long time. With the Q122 results, JDC owned 3.7% or more than 500k shares. With the buyback so far, JDC’s ownership of JDC shares will have increased to 3.8%. JDC could use these shares to pay for M&A transactions or retain the shares.

In our previous reports we have compared JDC with a group of financial brokers and platform peers. As we are now using our own estimates, we have also included a DCF valuation.

Our discounted cash flow model is based on the following assumptions:

We set a risk-free rate and market equity risk premium of 3.0% and 5.0% respectively, delivering a WACC of 9%. Our DCF model suggests a fair value for JDC of €37.90 per share.

As we explained in our update note published on 30 May, we believe financial broker Aon and aggregators in the UK like Moneysupermarket.com are relevant comparisons for the advisory part of JDC’s business (although Aon is substantially larger, with a market cap of $57.2bn). Compared to these companies, JDC trades at a premium on EV/EBITDA but at a steep discount on EV/sales due to its higher profitability.

JDC’s Advisortech activities are a platform business. This part of the business is best compared to financial platform providers like Hypoport in Germany and US platforms such as Goosehead. Hypoport offers a B2C independent advisory platform for German mortgages through different labels, but especially Dr Klein. Compared to Hypoport, JDC now trades at a premium on 2022e and 2023e EV/EBITDA multiples, but at a discount on EV/Sales. Compared to Goosehead, which has a similar platform to JDC but is also more of a B2C business, JDC trades at a discount on both EV/Sales and EV/EBITDA.

Although we realise that a peer comparison for JDC is not easy given its diversified profile, we note that it trades at a 61% discount on FY23e consensus EV/sales compared to platform peers and 49% compared to financial brokers.