XPS Pensions builds cash margin and reports impressive growth

XPS Pensions’ (XPS) full-year figures were well received by the market, unsurprising given that the pensions consulting and administration group delivered double-digit sales increases across all its business segments. The pensions administration business was probably the standout performer with adjusted revenues up by 25 per cent to £71.9mn, although the pensions actuarial and consulting unit drove its top line by a similar margin. Reported profits benefited from the sale of the National Pension Trust for an initial cash consideration of £35mn, although they were still up by 38 per cent on an adjusted basis to £44.5mn.

Operational gearing supported profitability, with the adjusted cash margin up by 240 basis points to 27.9 per cent. XPS put the seventh consecutive year of revenue growth since its admission down to “the non-cyclical, predictable and resilient nature of the business”, together with “the benefits of investments made in services in prior years”. That’s not an unreasonable boast, but as Jemma Slingo cautioned when she reviewed the investment case in March 2023, “margin growth has been a sticking point” in spite of the evident structural growth drivers. Tellingly, the improvement in marginal profitability through FY2024 was achieved against an inflationary backdrop, but operating expenses fell as a proportion of group revenues.

Management maintains that opportunities are opening up due to the growing overlap between the pensions and insurance industries, a point borne out by changes to the way in which bulk annuities are increasingly handled. The strong trading momentum has continued into the current financial year and the group’s elevation to the FTSE 250 index should translate into enhanced mandated support. The forward rating of 15 times consensus earnings leaves room for share price gains given growth prospects. Buy.

Last IC view: Buy, 229p, 23 Nov 2023