Further IPS growth and increased fair value
LWDB’s IPS business is split into three divisions: pensions, corporate trusts and corporate services. FY19 has marked another year of good progress for the business as a whole, following several years of broadly flat returns until end-FY17. Top-line revenue growth (net of cost of sales) of 7.5% was around the midpoint of the mid- to high single-digit growth target for the year, while profit after tax, up 8.5%, was towards the higher end of the target range. Jackson says LWDB has invested significantly in IPS this year and is driving its businesses forward, recycling old supplier relationships into better ones. Thorpe adds: ‘We are maintaining our margins and reinvesting, both in people and technology. If we can be smart users of technology, we can invest for the future while maintaining our growth trajectory’.
Looking at each division in turn, the pensions business – as in FY18 – saw the strongest net revenue growth, up 11.7% (FY18: +14.7%). LWDB is the UK’s largest independent pension trustee, acting for more than 200 defined benefit (DB) schemes with over £350bn of assets and three million members. Jackson comments that the 51-year-old business continues to benefit from regulatory drives to professionalise pensions governance. ‘It is a growing business with regulatory support and should be really resilient in a downturn as the work still has to get done’, says the CEO. With a finite number of independent trustees to go around the UK’s c 5,500 DB schemes, there is an opportunity for small schemes to gain purchasing power through consolidating within a master trust structure, where the individual scheme assets remain segregated but there is a pooled layer of expert governance. Since 2017 LWDB has also offered Pegasus, an outsourced service for companies with defined contribution (DC) schemes, offering an end-to-end menu of services – ‘everything from minute-taking to completely outsourcing pension scheme management’, says Jackson. The CEO says the pensions business has continued a strong year of hiring, adding significant capacity in H219, which has helped drive the division’s higher returns. ‘The biggest constraint is hiring quality people to meet the demand’, he adds.
Beginning in 1889, the corporate trusts business is the foundation of LWDB, acting as a bridge between the borrower/issuer of a loan or bond, and the lender/investor, as well as providing escrow service for merger and acquisition (M&A) transactions. Net revenue growth of 7.9% in FY19 was an improvement on 5.8% in FY18 against a tough market backdrop for investment banking in Europe. ‘We have fought hard to gain market share. It is a competitive space and we are content with these results; investment banking fees are down, so we are happy to be up’, says Jackson, adding that the business is diversifying away from its traditional client base of banks and law firms, and building more relationships with boutique asset managers. ‘Since the global financial crisis, increasing numbers of fund managers are making purchasing decisions and until recently we haven’t been out there getting the business’, he explains. Because of its specialist focus, Jackson says the division is able to act much more quickly than the large banks in giving a decision on whether or not it will act as trustee in a particular issue.
Exhibit 2: Fair valuation of IPS business
£000s unless stated |
31 December 2019 |
30 June 2019 |
31 December 2018 |
31 December 2017 |
IPS valuation |
|
|
|
|
IPS EBITDA |
11,515 |
10,828 |
10,424 |
9,797 |
EBITDA multiple (x) |
9.2 |
9.2 |
8.4 |
7.9 |
Operational value of IPS |
105,938 |
99,618 |
87,562 |
77,396 |
IPS surplus net assets |
16,367 |
15,962 |
16,844 |
17,176 |
IPS fair value |
122,305 |
115,580 |
104,406 |
94,572 |
IPS fair value per share (p) |
103.5 |
97.8 |
88.3 |
80.0 |
LWDB fair value |
|
|
|
|
LWDB fair value per share as per IFRS financial statements (p) |
655.7 |
619.4 |
566.3 |
633.3 |
IPS fair value adjustment per share (p) |
77.7 |
72.2 |
66.4 |
61.6 |
Debt fair value adjustment (p) |
(31.2) |
(27.9) |
(18.6) |
(25.4) |
LWDB fair value NAV per share (p) |
702.2 |
663.7 |
614.1 |
669.5 |
IPS book value (IFRS) as % of total |
4.0% |
4.1% |
3.9% |
3.0% |
IPS fair value as % total |
14.7% |
14.7% |
14.4% |
12.0% |
Source: The Law Debenture Corporation, Edison Investment Research
Corporate services is the largest division by net revenues (£12.2m of the £31.8m total), but saw the lowest rate of growth in FY19, up 3.7% compared with a 6.9% increase in FY18. This business is split into two parts, with a long-established role in helping clients establish and maintain legal entities such as special purpose vehicles, as well as a specialist Sunderland-based whistleblowing service, Safecall, which LWDB has owned since 2007. The core business, which provides company secretarial, governance, accounting and administrative services, is highly linked to the structured finance new issue market, and Jackson says the level of issuance has still not bounced back to 2007 (pre-financial crisis) levels. In addition, competition is very fierce, with many private equity-backed businesses in the space. ‘This still has to work its way through’, says Jackson. LWDB also offers a service of process business, with offices around the world servicing international companies that may, for example, favour the English legal system but otherwise have no need for a UK office. ‘We have great relationships and high-quality people, and we will stick to our knitting’, says Jackson. Regarding Safecall, the LWDB CEO notes that revenues are up c 20% this year on top of a 15.4% increase in FY18, meaning ‘this little business is no longer quite so little’. He says that growth is being driven by investment in technology (‘we have the best voice product and we want the best digital product too’), as well as regulatory tailwinds. In the UK, the Office of the Whistleblower Bill, which aims to set up a government body, one of whose duties would be to ‘form and maintain a panel of accredited legal firms and advisory bodies to advise and support whistleblowers’, had its first reading in the House of Lords on 28 January; if enacted, the office would be up and running within 12 months. Meanwhile, EU member states have until December 2021 to implement the new European Directive on protection of whistleblowers. While Safecall has historically been mainly a UK business (although it does have some blue-chip European clients), Jackson says: ‘If you look at the number of businesses in Europe that will need solutions under the new directive, it’s another big growth opportunity in a growing market’.
The operational value of IPS (based on LWDB’s internally derived multiple) rose by 21.0% in FY19 and the fair value of IPS per share rose by 17.0%, outstripping growth of 13.1% and 10.3% respectively in FY18. At 103.5p per share (the first time it has been above £1), the fair value of IPS accounted for 14.7% of LWDB’s NAV per share (with debt at fair value), a similar level to both end-FY18 and end-H119. The IFRS book value rose from 21.8p to 26.0p per share (+19.2%) in FY19; the 77.7p per share fair value adjustment was a 17.0% increase from 66.4p in FY18.
Opportunities from greater market focus on ESG
In the past 12 to 18 months there has been a massive increase in focus on environmental, social and governance (ESG) issues, both within investment markets and in wider society. Jackson says LWDB is well-placed to benefit from this trend through its various IPS divisions. ‘What we provide in ESG terms is a lot of the G and increasingly more of the E and S. As a pension trustee, we sit between the assets and the pensioners and look to get the right outcome for them. The regulator is demanding certain actions – for example, an updated statement of investment principles that considers the environmental impact for every pension fund we work on. It’s a growing market that needs to be served, supported both by regulation and pensioners – particularly the younger scheme members’. The CEO adds that pensions minister Guy Opperman ‘is quite evangelical on ESG’, meaning that this agenda could drive additional pensions work, on top of any changes to the pensions regime introduced by new Chancellor of the Exchequer Rishi Sunak: ‘Chancellors love tinkering with pensions, and every time somebody changes the rules, that has to be implemented’, he explains.
The corporate trust side, acting as a bridge between institutions and bondholders, is benefiting from the growth in green bonds and real asset-type investments, which can be complicated security structures. ‘We are good at green energy – solar and wind – and we are also strong in UK social housing’, says Jackson. ‘Everyone realises that social housing is a critical sector, but it is dealing with complex, long-dated real assets and it needs a good trustee’. Meanwhile, in corporate services, Safecall, which sits between whistleblowers and management, ‘is firmly in the middle of the ESG debate’. The CEO adds: ‘We think we have the opportunity to grow our market share further in a growing market for all our products’.