Earlier in the year, I said that Aviva (LSE: AV) (NYSE: AV.US) looked cheap on a forward basis relative to the market as a whole. As if on cue, the market tanked right after that, shedding 11% of its value over the following month and a half. Even though stocks came bounding back for a bit to levels near where they had been, any talk of relativity was, shall we say, gone in the speed of light.
If you bought into the falling price of Aviva, just as I suggested, then you will have made some good money. But while Aviva might turn out to be a good buy-and-hold investment, gains have hardly been forthcoming for these sorts of investors thus far, who may have gotten a little more choppiness than they had bargained for. When relative value goes out to tide, you need a different sort of dinghy to ride into shore.
Nimble & Cash-Rich: Jelf Group
It’s best in these sorts of conditions to focus on nimble players with low levels of leverage and lots of earnings coming in that can be used to snap up smaller competitors and sideline businesses that find themselves unstuck in the same environment. For an example of just such a company, look no further than Jelf (LSE: JLF).
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Jelf has leaped an astonishing 42% in the past year, and while the bulk of that action took place in the first quarter, all the signs are on the wall that it’s about to do something similar again in 2015.
Until British insurance premiums pick up again, it’s unlikely that any insurers are going to have operating earnings growth to write home about. Which means that the opportunities in this sector from an investing standpoint are with those companies that can scale out their business lines quickly while maintaining existing operations in a relatively competitive hold.
Acquisitions, Acquisitions, Acquisitions
That’s much easier said than done, but it’s what Jelf’s management team has proven capable of doing with the £135 million of market cap they have to work with and steer upwards. In May, the company completed the purchase of The Insurance Partnership Services (TIP) for £12 million, principally to boost up its presence in Hull, Leeds and York, which were showing signs of significant economic improvement.
A glance at this week’s earnings report by Jelf proves that the bet appears to have paid off nicely. While the company could report that the added operations decreased its overhead expenditure as planned, it also revealed that it has paid off a lot of the debt incurred before the acquisition as a result of stronger-than-expected earnings generated by the TIP acquisition. Overall, Jelf wiped £7.8 million pounds of liabilities off its balance sheet, bringing net debt down to just £5.7 million. That’s something to shout about in any market.
Given that Jelf has proven apt at managing the complex and messy process of integrating less-than-stellar subsidiaries into its fold right in time for what may be the last big shake-out of SME insurers for a while, there’s lots of reason to be optimistic that the company’s share price might rocket next year at least as much as it did in the course of this one.
It’s fair to say that investors should probably place a much higher acquisition premium on Jelf’s deals right now than on those of some of its rivals (after all, who else do you see doing the same?)
So if we assume an EBITDA acquisition multiple of 24x earnings to account for the outperformance, and dilute the forward projection over 122 million outstanding shares, then Jelf is fairly priced at 312p. Even if we cut that multiple in half, there’s still 156p of value right now in the stock, which is 25% above where it sits.
