JDC Group — Business model proves resilient to COVID-19

JDC Group (SCALE: JDC)

Last close As at 04/11/2024

EUR21.30

0.30 (1.43%)

Market capitalisation

EUR288m

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Research: Financials

JDC Group — Business model proves resilient to COVID-19

Bancassurance advisory and service platform JDC Group’s H120 results showed healthy growth in a market environment in which traditional banks and insurers are suffering. A fast-increasing number of insurance contracts are being transferred to JDC’s platform, as contracts renewals come in from the insurance pools that were added by the large client wins announced in the last two years. Together with new client wins this will continue to drive growth. The valuation of 13.3x consensus FY21e EV/EBITDA does not seem demanding compared to international peers given the strong prospects for continued growth.

Edwin de Jong

Written by

Edwin De Jong

Analyst

Financials

JDC Group

Business model proves resilient to COVID-19

Diversified financials

Scale research report - Update

26 August 2020

Price

€8.04

Market cap

€105m

Share price graph

Share details

Code

A8AX

Listing

Deutsche Börse Scale

Shares in issue

13.1m

Last reported net debt at end-H120

€11.0m

Business description

JDC Group is a digital financial services group providing advice and financial services, both directly to end customers and via independent intermediaries on its digital platform. It operates one of the largest broker pools in Germany and wants to be a market consolidator.

Bull

Strong position to support digital investment.

Encouraging new client wins.

Profitable consolidation opportunities.

Bear

Capital market weakness from second wave COVID-19-related uncertainty or another cause affecting investment results in advisory.

Low interest rates and regulatory uncertainty affect the insurance industry.

Transfer of contracts to JDC’s platform could stall.

Analyst

Edwin De Jong

+44 (0)20 3077 5700

Bancassurance advisory and service platform JDC Group’s H120 results showed healthy growth in a market environment in which traditional banks and insurers are suffering. A fast-increasing number of insurance contracts are being transferred to JDC’s platform, as contracts renewals come in from the insurance pools that were added by the large client wins announced in the last two years. Together with new client wins this will continue to drive growth. The valuation of 13.3x consensus FY21e EV/EBITDA does not seem demanding compared to international peers given the strong prospects for continued growth.

Healthy growth in revenues and results in H120

Despite the economic effects of the COVID-19 pandemic, JDC Group reported 12.0% higher revenues in H120 to €58.8m. The increase was driven by a strong growth of commission income on investments and non-life insurance, and also because of an increasing number of contracts being transferred to JDC’s platform from the large client wins in the last two years. Income from new pension plans and property financing were weaker driven by COVID-19. EBITDA increased 10% to €3.1m compared to H119, as JDC Group had higher one-off expenses for its staff working at home and the relocation of the head office. Net profit increased 52% to €0.2m.

Outlook reaffirmed and realistic

The company reaffirmed its FY20 guidance of sales of €125–132m (implying a growth rate of 12–18% y-o-y) and higher EBITDA (the reported figure for FY19 was €4.2m). Under the assumption that Q3 and Q4 are more or less normal quarters again, we believe this to be realistic for the revenue guidance, given the increasing transformation of contracts from the new clients. However, the EBITDA guidance seems conservative with €3.1m already realised in H120, including €0.3m in one-off costs. Refinitiv consensus for EBITDA in 2020 is at €5.7m.

Valuation: Higher growth justifies higher valuation

We have compiled a peer group of listed insurance brokers and aggregators. JDC Group trades on a premium of 18% to this group on FY20e EV/EBITDA, as its growth profile has been much more attractive over the last few years. This is also reflected in the discount on EV/EBITDA in 2021e. We expect that JDC Group’s profitability compared to peers will continue to grow, as much of the top-line growth from the large client wins is still to come and the cost base is relatively stable.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

EPS
(€)

DPS
(€)

EV/EBITDA
(x)

Yield
(%)

12/18

95.0

1.5

(0.34)

0.0

80.1

N/A

12/19

111.5

4.2

(0.14)

0.0

28.6

N/A

12/20e

126.0

6.4

0.03

0.0

18.7

N/A

12/21e

140.3

9.0

0.17

0.0

13.3

N/A

Source: JDC Group, Refinitiv consensus at 24 August 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.

Resilient results in H120: EBITDA up 9.5%

JDC Group reported healthy growing revenues and results in H120, despite the COVID-19 pandemic, and reiterated its outlook of revenues of €125–132m at a higher EBITDA level. Revenues increased 12.0% in H120 to €58.8m with 6.5% top-line growth in the usually weaker Q2, also the quarter most affected by COVID-19.

Revenues were mostly driven by the Advisortech business with an increase in revenues of 12% to €49.6m, while the Advisory business posted 9% growth in revenues to €14.0m. Eliminations at the holding level were stable at €4.7m. Advisortech relates to JDC Group’s technological platform, initially built for the financial advisory business of JUNG, DMS &Cie, but also sold to third parties. The platform can be sold either as a white-label product with the client’s look and feel or as a separate service. See for example www.allesmeins.de and the direct customer platform www.geld.de. The Advisory activities are organised in FiNUM, an independent advisory business for mostly wealth clients distributed through a network of >300 agents.

Related to COVID-19, JDC Group had to cope with a lack of new business for German occupational pension products, which are usually closed by employees in person at the company office, and with the more cautious position of banks relating to mortgages/property financing. These negative effects were however more than offset by strength in the investment business because of large inflows into mutual funds and also in the non-life insurance products.

The EBITDA margin decreased somewhat driven by relatively higher commission expenses as a percentage of revenues, driven by more new business, which usually carries lower margins as well as €0.3m of extraordinary costs related to restructuring, expenses to enable working at home and the move of the group’s head office. This meant that EBITDA showed an increase of 9.5% to €3.1m. EBIT improved 16% to €0.9m and net profit grew 52% to €0.2m.

Exhibit 1: H120 results highlights

€’000s unless otherwise stated

H120

H119

Change y-o-y

Total revenue

58,820

52,513

12.01%

Initial commission

40,152

34,204

17.39%

Insurance products

29,368

25,140

16.82%

Investment funds

8,340

6,838

21.97%

Shares/Closed-end funds

2,444

2,226

9.79%

Follow-up commission

10,292

9,284

10.86%

Overrides

3,553

3,562

-0.25%

Services

1,707

1,666

2.46%

Fee-based advisory

1,365

1,490

-8.39%

Other income

1,751

2,307

-24.10%

Capitalised services

480

488

-1.64%

Other operating income

148

99

49.49%

Commission expenses

(42,568)

(37,506)

13.50%

Commission expense as % of revenues

72.37%

71.42%

-95bp

Personnel expenses

(8,934)

(8,369)

6.75%

Other operating expenses

(4,812)

(4,858)

-0.95%

EBITDA

3,134

2,861

9.54%

D&A

(2,187)

(2,044)

7.00%

EBIT

947

817

15.91%

PBT

220

186

18.28%

Net income

190

125

52.00%

EPS (€)

0.02

0.01

100%

Source: JDC Group

Cash flow generation was strong in H120 with an improvement of €1.9m in operational cash flow to €5.7m, mostly as a result of lower receivables. Nevertheless, total cash flow was negative (€12.2m), driven by the planned redemption of bonds (€14.2m) and a regular level of investment cash flow (an outflow of €3.8m). This resulted in a cash position of €8.9m, which is sufficient to run JDC Group’s operations. All in all, net debt was stable at €11m compared to the end of 2019. JDC Group’s solvency improved to 32.3% compared to 29.8% on 31 December 2019.

Transformation of outsourcing contracts accelerates

Growth of new business, winning (insurance) contract pools from large clients, and the transfer of individual insurance contracts from these clients to JDC Group is what makes the business grow, together with M&A, which also continues to be a point of focus. With its relatively fixed cost base, adding contracts directly translates into more EBITDA for JDC Group.

Since 2018, JDC Group has landed nine large outsourcing contracts, ranging from Albatros (Lufthansa) in 2019, to Bremer Sparkasse in Q220. JDC Group CEO Sebastian Grabmaier expects to win two to three more of this type of contract this year. For these clients, JDC Group offers a portal (which can be white label) from which the consumer can handle most of their financial needs. The platform is linked to the back-office systems of the banks and insurers that offer products and the client organisation, in that way reducing the need for consumer-facing operations for the client.

After a usually modest initial service fee and a pre-agreed number of clients that can be directly transferred from the existing providers, for instance Albatros, individual insurance contracts have to be transferred to JDC Group’s platform and that drives growth.

JDC receives a percentage (typically 20–30%) of the commissions received by its clients, which JDC Group estimates at roughly €32 per insurance contract on average with a usually higher annual fee percentage for retained contracts. The number of transferred contracts more or less doubled from 20,880 in H119 to 41,532 in H120.

The newly won contract with Bremer Sparkasse has very large potential with 400,000 retail clients and 26,000 corporate clients. All in all, JDC expects that these large contracts and transfers will add >€20m of turnover from this year.

In terms of M&A, the acquisition of broker pool KOMM Investment & Anlagevermittlungs for €3.6m in cash (as discussed in one of our previous update notes) in 2019, has been the most recent transaction. JDC is clearly still looking for targets and discussions are ongoing, but there has not been a lot of appetite in the market to sell.

Valuation does not seem demanding

In the Advisortech division, JDC competes 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.

Local listed companies that have their own platform include Netfonds and Hypoport. We also consider much larger international insurance brokers like MMC, AON, Willis Towers Watson and aggregators in the UK like Admiral and Moneysupermarket.com, as 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.

JDC Group trades on a premium of 18% to this broad group on FY20e EV/EBITDA. However, JDC Group’s growth profile has been much more attractive over the last few years, which is also reflected in the 11% discount on EV/EBITDA in FY21e. The most important risks are changes to the regulatory environment in Germany and Austria, but also negative capital market returns would put pressure on JDC Group’s results, as part of the earned commissions are dependent on assets under management.

JDC initiated a share buyback programme in July last year. Up to 30 June 2020 it had bought back over 0.5m shares of the up to 5% (or 0.7m shares) shares that it intended to purchase. The shares that are purchased are kept in treasury.

Exhibit 2: Peer comparison table

 

 

Market cap
(local currency, m)

FY20e EV/sales

FY21e EV/sales

FY20e EV/EBITDA

FY21e EV/EBITDA

MMC

$57,476

4.1

3.9

15.8

14.9

AON

$44,857

4.2

4.1

14.0

13.1

Willis Towers Watson

$25,524

3.3

3.1

12.3

12.0

Admiral

£7,839

11.7

10.4

17.3

18.8

Moneysupermarket.com

£1,618

4.6

4.2

14.4

12.2

Netfonds

€66

0.6

0.5

19.9

14.9

Hypoport

€3,058

7.8

6.6

54.3

42.3

Median peer group

 

4.2

4.1

15.8

14.9

JDC Group

€104.3

1.0

0.9

18.7

13.3

Premium/(discount to peer group

-78%

-79%

18%

-11%

Source: Refinitiv consensus data. Note Prices as at 24 August.


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