Purchase #8: Just Group plc

I have made the 8th purchase for the 10foot portfolio, UK-listed financial business Just Group plc (LON: JUST). As my Mayne Pharma thesis was too long, I have kept this one very short.

The business opportunity:

Just sells annuities and reverse mortgages to retirees, and provides outsourcing for corporate DB pension plans. DB outsourcing is expected to be a big opportunity over the next 20 years.

DB (Defined Benefit) pensions are business-paid pensions that guarantee a fixed benefit each month to retired employees until death. They are a huge liability as the company doesn’t know how long the employee will live etc, and it ties up capital that could be used elsewhere. A company can pay Just Group to take the liabilities off their hands, and Just will invest the funds in order to meet the DB liabilities and make a profit. Conservatism and caution is the watchword and the company has impressed me with its actuarial processes and management approach.

With ageing populations, annuity and reverse mortgage demand is expected to grow, and the opening up of these markets to competition is expected to deliver new opportunities to Just. Just is focused primarily on writing profitable business at the expense of volume so it is unlikely to grow hugely, but should prove a nice earner. This also raises risks if/when other companies start to cherry pick the profitable opportunities.

The value case

In my view, the best proxy for fair value for this type of business is its net tangible assets. I purchased Just Group on par with its NTA of ~150p, or slightly above once transaction fees are taken into account. The company looks to be priced at about 12x full year earnings.

Embedded value, or the value expected to be realised over time if Just stopped writing business tomorrow, is about 221p (40% more than the purchase price) and I expect to see this and book value grow over time.

The risks

Just Group is kind of a middleman between relatively fixed liabilities (DB, annuities etc) on one side and relatively variable assets (bonds, reverse mortgages, etc) – actually both are probably best described as flat out ‘variable’ – which is a terrifying position to be in, so investors need to be very certain of the company’s ability to meet its liabilities.  For example, as little as a 5% increase in liabilities would wipe out something like 60% of Just’s equity, so the actuarial process is paramount. Just appears to have solid systems in place here. Among other things it persistently under-forecasts the death rate, which effectively increases reserves held and offers a margin of safety.

Property is also a concern, with zero interest rates in the UK. However, maximum loan to valuation ratios on reverse mortgages are modest, the most you can borrow is 54% of your home’s value at age 85, and the average life expectancy is 82 years. I have estimated Just could weather a 30% fall in property values, possibly more, as long as it can still sell properties when necessary, or at least warehouse them for a while until property sale volumes pick up.

A note for the keen

I have said before that this blog is not about providing recommendations, but it is worth repeating that warning here.

Please do not read this post and think ‘you bewty, old people!‘ and “12x earnings!”, and think of Challenger Ltd (ASX: CGF; up 250% in 5 years) and mortgage the house to buy Just. I think Just is the kind of business where the risks are not easily grasped without a little research, and can easily result in investors taking more risk than they intended. If you are interested I would start with reading all of the company’s seminars from the last couple of years to understand the risks and how the business works. Also look at the merger and why the company had a financial year that was 18mths long recently.

Speaking of similarities to Challenger, I wouldn’t mind seeing Just purchase a wealth management business in the future…

A note on the first foreign purchase and benchmarking

I did a significant amount of work on Just a few months ago and quite liked the company, but procrastinated for a while about whether it would fit with 10foot which was originally intended to be ASX-only. I decided it would be dumb to artificially limit my investing universe when I had a great idea outside of it.

10foot will still be a majority Australian portfolio and I will continue using the ASX XNT, XJO, XSO indices as my benchmarks for now. In time another index, or an absolute return target, might become more appropriate, and I will make changes as necessary.

On 25 September 2017 I purchased 200 shares in Just Group at 154.19 pence including brokerage (why does the LSE trade in pence and fractions of pence?!!) or 308.37 pounds in total.

In our money I paid A$526.81 or $2.634 per share in Australian Dollar terms including brokerage. I have not yet decided whether to report in GBP or AUD – the former is more useful for tracking stock performance, and the latter more useful in tracking portfolio performance.

I own shares in Mayne Pharma and Just Group plc. This is a disclosure and not a recommendation.

I’m just putting the finishing touches on the September quarterly review. I expect that will be finished in the next couple of days.

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