Today (7 March), Just Group (LSE:JUST), the FTSE 250 financial services provider, released its 2024 results. And despite reporting a large increase in profit, investors reacted badly.
Comparing 2024 with 2023, the results show a 34% increase in underlying profit to £504m, a 36% rise in retirement sales, and an improvement in the return on capital. As a result, the directors were able to announce a 20% increase in the dividend.
At first glance, the shares appear to be a bargain. Underlying earnings per share was 36p, implying a price-to-earnings (P/E) ratio of only four.
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Summarising the performance, the group’s chief executive commented: “We made a pledge three years ago to double profits over five years. We have significantly exceeded that target in just three years and created substantial shareholder value as a result.”
So why did the company’s shares fall so much today? At one point they were down 15% before recovering slightly.
Different standards
I suspect it has something to do with the group’s use of alternative performance measures. These can produce different results to the statutory ones used by accountants, as laid down by financial reporting standards.
A look at the company’s accounts shows that the reported profit after tax was £80m. This was £49m (38%) lower than for 2023. And very different to its underlying profit of £504m.
Basic earnings per share for 2024 were 6.5p. Using this measure, the shares have a P/E ratio of around 23. Again, this is miles away from the headline number.
To help investors understand the variation in these figures, a reconciliation is provided.
The bulk of the difference is explained by the “deferral of profit in CSM” (£369m), which is excluded from underlying earnings. This refers to the Contractual Service Margin reserve, a bucket into which profits are deferred and reported at a later date.
Accounting standards require the profit from new business to be reflected over the lifetime of the contract. In contrast, when reporting its headline numbers, the company prefers to include it all at once.
Of course, there’s nothing wrong with either approach. The directors aren’t hiding anything, they are just choosing a different method to interpret its results.
What does this all mean?
In my opinion, this makes it difficult for investors to understand the numbers.
However, one thing that never lies is cash. It either exists or it doesn’t. During 2024, the group reported a significant increase in the cash generated from its operating activities. Overall, cash balances increased by 54%.
As well as this, in my opinion, there are other reasons to consider investing in the group. It’s growing rapidly and the company describes market conditions as “buoyant”. In addition, with a Solvency II capital coverage ratio of 204%, its balance sheet remains robust.
But there are risks.
Annuity sales may slow if interest rates fall as anticipated. And the group operates in a very competitive market that’s sensitive to wider economic conditions. Also, there are better income stocks around.
On balance, I’m still undecided. Therefore, I’m going to continue monitoring the company’s performance — considering both alternative and statutory measures — over the coming months, with a view to revisiting the investment case later in the year.
