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Newly-floated Xafinity ticks many of the right boxes we desire in a good investment
Thursday 23 Feb 2017 Author: Daniel Coatsworth

A company with high levels of recurring revenue, sticky clients, non-cyclical earnings and potential to pay attractive levels of dividends has caught our eye.

These are some of the key characteristics we seek in a good investment and they are all present at pensions services firm Xafinity (XAF) which floated on the UK stock market on 16 February.

Anyone wanting fast growth with exciting end markets should look elsewhere. Xafinity is far more pedestrian in nature.

It simply makes a tiny bit more money each year versus the previous year, judging by the three year financial history in its IPO prospectus.

There is nothing wrong with that; in fact we love boring companies if they can keep generating handsome levels of cash to fund good dividends.

Xafinity certainly fits the bill. Shareholders should expect a 4.2% dividend yield when buying at the latest price of 153p, according to our calculations and guidance from the £209m cap.

What does it do?

Xafinity used to be part of share registrar Equiniti (EQN) before being acquired by private equity group CBPE in 2013. Xafinity’s co-chief executive Paul Cuff says CBPE did the opposite of most private equity firms by investing money in the acquired business.

‘We needed to be established as a standalone business for the first time. CBPE set up new HR, marketing and finance functions, invested in technology and hired a new senior management team,’ reveals Cuff.

Its core business is helping companies with defined benefit pension schemes to work out if there is enough money to pay out benefits and where the money should be invested. It also carries out administrative tasks to ensure the right pensions get paid to the right people at the right time.

Xafinity says 82% of its revenue is ‘recurring’, which it defines as coming from a client who is billed every month consecutively for the previous 24 months. A further 17% of revenue is repeatable in nature.

What's the growth engine?

Growth is likely to come from the defined contribution (DC) pension market, essentially workplace pension schemes.

Employers used to tell staff they had to buy an annuity to get a guaranteed income in retirement. More flexible pension rules mean retirees can now stay invested in the market, but a lot of people don’t know what to do.

Many employers want to help staff navigate this more flexible pension market, even though this isn’t mandatory. One way is to switch staff from a DC scheme into a master trust which can be used as a decumulation vehicle.

Xafinity has a master trust platform called the National Pension Trust; it runs the infrastructure and a panel of trustees choose the underlying assets. This is a small part of its business at present with the potential to be much bigger.

Looks really interesting. Buy at 153p. (DC)

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