Jarvis Securities (JIM) – a little gem
I thought I’d highlight this little gem in advance of its full year results to 31st December 2017 that are due any day now. Jarvis Securities (LON:JIM) provides stockbroking services on a white label basis to other stockbrokers and investment managers. Its last couple of results have been very strong and the share price ran up to over 600p but have now dropped back towards the 500 – 540p range and are again looking attractively priced.
Jarvis with a market cap of £57.5m has some very attractive metrics – a StockRank of 89 with particularly strong quality metrics; 79% Return on Capital; 71% Return on Equity; and 46% Operating Margin. The operating margin is widening as scale economies kick-in and any further client wins should add significantly to the bottom line profits.
Jarvis has been using some cash it's generating to buy back shares but cash is building up on the balance sheet - so there is a possibility of a special dividend at some point (as was the case in 2015). Currently yielding 4.19% Jarvis has committed to pay-out 2/3rds of profits as dividends and does so as quarterly dividends – a feature I find very appealing.
Indications are that the H2 results will be good. The Q1 dividend was announced recently on the 8th February and at 5p was a significant 17% increase on last year. This is a clear signal of continued positive trading following on from the strong H1 results. Also, Barclays Stockbrokers have had a nightmare with their systems upgrade and we know that Hargreaves Lansdown have done well picking up clients as a result– it is likely that Jarvis has also benefited.
One negative is that MIFID II will have been a distraction and will almost certainly raised costs in the second half. So this is the background and I'm looking forward to seeing how Jarvis have performed.
Declaration - Maddox is long Jarvis Securities (LON:JIM)
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22 comments
Just revisiting this thread. If you hold Jarvis Securities (LON:JIM) you should be sure to read the strategic review in the annual report on the company website. The strategic review contains commentary and charts not in the RNS and gives a slightly different feel to some of the RNS commentary.
I agree with the "colourful" comments. Thats why OCT is only a small position for me.
The growth & valuation I couldnt ignore
Some of the more colourful stuff has emerged since i purchased and I wont be buying any more in a hurry !
It pays a divi though and investing in micro caps you cant avoid some warts.
I did some digging around Octagonal (LON:OCT) a while back out of curiosity , I can only say if it was the last quoted company listed i’d be in cash 100% ...I’d rather not say any more but googling around connected parties/options/sharedealing/companies house etc should give you a some colour..
Thank you gsbmba99
I am interested in both Jarvis and Octagonal (LON:OCT)
Both have been growing v fast and are very profitable. I am trying to understand their barriers to entry / moats because both look interesting given the returns on capital they generate, the growth they have been seeing and the valuation.
I shall be going to the AGM in Kent to try and find out more.
Hi VegPatch,
I found Octagonal (LON:OCT) similarly appealing till I noticed David Lenigas is a NED. Tom Winnifrith hasn't a good word to say about him, and plenty a bad word. Do you, or other readers, have a view as to why I should not be very concerned about Octagonal (LON:OCT) associating itself with such a man, please?
Regards,
Ed
If cash in the bank is £13.2m and this includes customer money, then a 0.5% increase in interest rates (as currently predicted for 2018) would only be worth £66k p.a. to JIM, assuming they passed none of the interest rate rise on to their customers.
Am I being overly simplistic or is the whole interest rate rise commentary in yesterday's RNS completely immaterial?
Comments very welcome. Cheers, Martin
Hi Martin
Am I being overly simplistic or is the whole interest rate rise commentary in yesterday's RNS completely immaterial?
Jarvis Securities (LON:JIM) earned £3.8 million last year on "treasury deposits, cash at bank and overdrawn client accounts": basically all of that is interest rate related. That's about a third of their earnings.
I don't know what kinds of rates they're getting on deposits, but it's not hard to see how a move from 0.5% base rates to 0.75% might make a significant difference.
timarr
Hi timarr
Thank you for your reply.
I guess I am curious as to what other money Jarvis Securities (LON:JIM) is earning interest on beyond that shown on the balance sheet. £3.8m of income is completely inconsistent with what's on the balance sheet.
One of the numbers Jarvis Securities (LON:JIM) studiously avoids quantifying is "Cash under Administration". I guess this is held off balance sheet? The 2016 results even have a graph showing how this has increased but no scales are provided so who knows what size this is.
Cheers, Martin
Implicit in that £3.8m is that the money
You have to do a fair amount of digging with Jarvis. They don't do a lot to help you. However, if you go back to the 1H13 results (I think), you can find the last published cash under admin figure and then roll it forward using the KPI for growth in cash under admin at each subsequent interims publication. The 30 Jun 17 number was, according to my calculations, £211.5m. Using this figure and interest income you arrive at net interest margin of about 1.80%. This is way down in recent years but noticably higher than people like Hargreaves Lansdown (LON:HL.) who generate about 0.4-0.5%. If net interest margin ever stops contracting, you should see interest income grow at or above the rate of growth of cash under admin (5 year CAGR to Jun 17 is 24%).
Jarvis Securities (LON:JIM)
I noticed that Commission Revenue went from £3.7m (2016) to £4.1m (2017).
Does anyone know if this is relatively high recurring revenue?
I'm trying to ascertain what next year might look like if interest rates continue to rise and/or customers stop trading as often.
If say an increase in interest rates led to a 20% decrease in trades/customer cash held, then that would have a material impact on, at the very least, future Fee and Interest earnings, and makes me question whether the shares are actually cheap at the current price.
I also noticed that cash in the bank is £13.2m, but £8.0m of this is customer money being held for settlement. Actual company cash is only £5.2m. This is still not bad, but makes the EV look much better than it actually is on the Stocko reports.
Long (for now)
A
I ponder what we should expect from ROCE.
If the business operates in an area where the need for capex is minimal surely we would expect the ROCE to be high. Is the issue perhaps more, is the the ROCE higher or lower than expected for this type of business?
I’m a bit concerned by the very erratic cash flows. It suggests to me that what I would have thought of as being a ver predictable business actually has a lot of variability in its customer base and perhaps more non-recurring business than I would have expected.
I ponder what we should expect from ROCE.
ROCE doesn't really have much meaning in the financial sector. That's why financials are excluded from the Greenblatt Magic Formula which uses Return on Capital as a key metric.
All the best, Si
Warren Buffett has noted that over time the return on capital employed (ROCE) is a key guide to long term success. Here is a company with a ROCE of 79%, cash in the bank equivalent to two years gross revenue, no debt and good growth. I appreciate their careful forward forecasts but believe feel this company is setting itself up for a long future of growth.
Hi Tony,
Welcome aboard. Yes, appreciate your concerns. However, some very successful investors positively favour 'family owned' businesses - such as Lord John Lee https://www.amazon.co.uk/How-Make-Million-principles-successful/dp/1292005084 his excellent book explains it better than I can.
My own thoughts are to look at the evidence and figures. Jarvis Securities (LON:JIM) metrics such as the 2/3rds pay-out ratio, quarterly dividends and tight cost control (albeit noting the recent grudging rise) tell a story. Often, where the firm's management has family money involved - investors whom are dependent upon the dividends - they tend to look after them well (and us). Now, to be totally honest, I don't know that this is the case here but ......and I do like those quarterly dividends and attractive yield. It's a style of management I appreciate.
Regards Maddox
I've had shares in JIM for years since their listing on Ofex. They were once partly owned by a company called Sion which was controlled by the Grant family. A little while ago the shares were transferred to the Grant family as direct holdings in my opinion to make the ownership more transparent. Sion is a property company and in past years its dividend income was no doubt put to good use in the property business but there maybe inheritance tax issues behind the change in shareholding structure. Interesting that a major shareholder of JIM is a local building company, Kerwen Bros. Do they like what they see close up? It seems like it.
Hi Maddox
Thanks for bring this to my attention bought a very very modest amount today but was wondering your thoughts (or anyone else ) on the Grant family owning 52% of the company . I personally do not mind as this avoids some ego maniac CEO running the company and as family owned may ensure better stewardship just wanted your thoughts as you have a longer term history with the share .
http://www.jarvissecurities.co.uk/Shareholders_DirectorsDealings.aspx
I'm a holder here. Bought a few more this morning. I like attractive, growing dividends even more when they're paid quarterly.
I see that WH Ireland have slashed their EPS forecast for 2018E by nearly 1% all the way down to 32.9p from 33.2p. Strangely, it's a £100k reduction in revenue as opposed to increased cost that's triggered the revision. I'm very surprised that net interest margin contracted in 17. I had expected no further deterioration. Silver lining is that they've delivered these results while continuing to face a net interest margin headwind.
Interest rate hikes in response to higher inflation ought to help Jarvis Securities (LON:JIM) and near-term volatility unlikely to hurt either.
Hi timarr,
Yes, precisely, and it would be good to get someone whom is implementing MIFID to give us a view on:
> Are the on-going costs of compliance with MIFID significant?; and
> Are they fixed or variable (in which case operating margin will be impacted)?
Anyone with direct involvement wish to give us their view?
Regards, Maddox
Hi timarr,
Great to hear from you. Strong results and the quote you've picked seems to highlight key points:
>> Looks like MIFID has been a driver of the rise in costs; and
>> Rising interest rates should make a positive contribution to profits.
Reaching compliance with MIFID appears to have been a major distraction. I'd like to know whether this is mostly a one-off or will remain a burden?
Regards, Maddox
Hi Maddox
Ditto. Mr Market appears to take a dim view of the results, but as we've seen in the last week, Mr Market isn't the most psychologically stable of individuals ...
MIFID compliance will continue to be a burden, but obviously it will become systematic once things have settled down. And, of course, all brokers are affected by it. The questions are, therefore, (1) will margins be permanently impacted and (2) will Jarvis Securities (LON:JIM) handle the overhead better than its competitors?
Having run out of chicken entrails I don't know the answer to either of those, but I'd guess: (1) yes, but reducing over time and (2) based on past performance, yes, offering a small potential balancing uplift in earnings.
UK financial advisors are in a sweet spot at the moment, I'm particularly encouraged to note that Jarvis Securities (LON:JIM) feels that interest rate increases will benefit their business given that you'd expect it to drive a rotation out of equities into bonds. But pension deregulation, Brexit and potential changes to capital gains taxes are all likely to benefit them.
Cheers!
timarr
Hi Maddox
Results out, in fact: https://www.investegate.co.uk/...
22% increase in PBT and EPS, 34% increase in dividend. The narrative is, as usual, cautious and realistic:
I hold, happily.
timarr