| 2021 | 2022 | ||||||
| Price: | 11.00 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 13 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 139 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | 8 | EBIT | 0 | 0 | |||
| TEV (in $M): | 147 | TEV/EBIT | 0 | 0 | |||
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Description
JDC Group is the leading software provider for the processing and administration of financial products for the German insurance industry. The stock is mispriced as German investors are mainly focused on the company’s current earnings. However, these earnings are depressed both as a result of COVID and due to the J-Curve of results that occurs with the company’s recently signed strategic partners. Furthermore, the company’s recently announced win with German insurer Provinzial is a key inflection point for JDC as it is projected add e100mln of revenue over the next 5 years, an almost doubling of 2020 revenue of e123mln.[i]
As a result of the Provinzial and other wins and the highly-fixed cost nature of the company’s technology platform, JDC has provided targets for 2025 to double turnover and multiply EBITDA.[ii] If successful, these significant results could drive an increase in JDC’s share price to ~e30 from current levels of ~e11.
Business
JDC operates multiple businesses that deal with the management of contracts in the German insurance industry.
While the company is current active as a broker pool and brokerage network, the bulk of the future value derives from its Allesmeins white-label offering of software and services for the management of insurance contracts to German banks, insurance companies and internal insurers at German industrial companies.
JDC is currently the leader providing outsourced insurance technology solutions with multiple major clients including BMW, Lufthansa, Volkswagen, Comdirect, Sparda Bank and Boehringer Ingelheim.
Commentary from JDC’s partners has been very positive. Some examples (emphasis mine)
Jennifer Glindemann, who heads sales at the Rheinland Versicherungsgruppe, explained how a successful cooperation between the AO of an insurer and JDC can be established. "Today we feel like an insurance broker," says the expert in her lecture "The modern AO 2.0". For the cooperation with JDC, the insurance company founded Rheinland Service GmbH, a multiple agent.
There are now 25 insurance companies connected. Glindemann: "We have a better offer and better support via JDC". Billing would also work centrally.[iii]
Alexander Michel, founder and managing director of dwins GmbH, says about the
cooperation with JDC: "The intelligent API infrastructure of JDC was decisive
for our choice of partner. With JDC technology, we will offer our customers a
maximum user-friendly and intuitive interface for managing and buying
insurance products."[iv]
“Along with our multi-banking approach, the partnership with Jung, DMS & Cie. will allow
us to take an active role in the multi-insurance segment and in so doing provide our
clients with guidance and orientation in today’s insurance jungle”, says Martin Hettich,
CEO, Sparda Bank Baden-Württemberg. “This will makeus an all-round advocate for
our clients in matters relating to investment, foresight and risk protection”, Hettich
continued. [v]
Competition
In the broker pool market, JDC competes with companies including Fonds Finanz, Netfonds AG and Blau Direkt. JDC considers itself the technology leader in the space as it shares the technology that it develops for its white-label partners.
For white label, JDC currently has limited competition and has won the vast majority of the tenders in the past couple of years. Smaller competitors include Friendsurance and Moneymeets and competitors Clark just decided to exit white-label as they decided they could not compete. Eventually, German fintech Hypoport will enter the space but their solution is still probably 18 months away.
To me, the best evidence is that JDC is the leading player in German white-label insurance tech is that they have been the only one announcing wins in the past couple of years.
As further evidence though, please see some commentary from an employee at their main future competitor Hypoport (emphasis mine)[vi]:
CSO / Chief Sales Officer Insurance Market at Hypoport SE
There are not a lot of competitors because in the last years in Germany, we have a consolidation in this market. And there are players. They started in white label solutions, like Getsafe, Knip, CLARK, Lemonade and other companies, for example, but CLARK is a good example because they said, okay, this white label business, it's not our business anymore. So they go directly to the client.
So there are not so many players in the market, really. We have moneymeets is a small company, but JDC is one of the leaders in this white label solution.
Tegus Client
I mean, at this point, it seems like JDC is the only one announcing customer wins. Is that a fair assessment?
CSO / Chief Sales Officer Insurance Market at Hypoport SE
Yes. I would say they (JDC) are currently, they are the leader in this case. When we speak for white label offering solutions.
Management
JDC is managed by its co-founders, CEO Sebastian Grabmaier and CFO Ralph Konrad. Grabmaier previously worked at Allianz and as a lawyer (JD University of Chicago). Grabmaier was named Cash-online.de, CEO of the Year for 2019.[vii] CFO Konrad’s career history includes venture capital and consulting.
In March 2019, Canadian insurer Great-West acquired 28% of JDC for e8.40 per share through their Irish subsidiary. Here is how they described the strategic purchase:
"The JDC Group's strong base, digital approach and management team have convinced
us," adds Declan Bolger, Executive Director of the Irish holding company: "To further
expand our business, we see big opportunities arising from the outstanding technology
and digital platform of the JDC Group. We love the brokerage business and want to offer
intermediaries not only excellent products, but also digital marketing opportunities. The
insurance settlement offered by JDC for third parties like banks will indirectly complement
our positioning in the market.” [viii]
The Management team previously repurchased ~4% of the company at an average share price of e6.10 shows some strong awareness of capital allocation and the management and supervisory board currently own 22.5% of the shares outstanding.[ix]
Capitalization and Valuation
JDC currently has 12.6mln shares net of shares held in treasury for an e139mln market cap at e11. The company has 11.7mln of cash and 19.3mln of debt for a total EV of e147mln. FY 2021 revenues are expected to be e138mln (1.1x) and FY 21 EBITDA is expected to be at least 7mln (20.9x).
Upside
While JDC has won a large number of white-label contracts, most of them are still not generating significant revenue as they were generally signed in 2019/2020 and take 24-36 months to ramp up and are often loss making for the first year. As an example, their Provinzial deal (announced Feb 2021) is not expected to have a major impact until 2023.
I believe JDC has a long runway for future growth. JDC’s TAM is huge as the German insurance market currently has e17bln of premiums and is just starting to move from paper solutions to digital. As JDC is the leading player in providing white-label software to this industry, I believe they have the potential to materially increase their market share from the just under 1% that they enjoy currently.
As a result of the agreements already announced, I expect JDC to grow FCF at an over 40% CAGR to 2025 and generate ~e1.20 per share. If JDC is able to generate more white-label wins, then the growth could accelerate even faster over the mid-term. Given this growth, if JDC trades at a 4% FCF yield (which I think might be conservative given continued growth outlook) then the share would be worth ~e30. That would correspond with ~15x 2025 EBITDA.
It should also be noted that German investors have been willing to afford big multiples once they have decided that a technology company is going to be a long-term winner. As an example, Hypoport is a more established but somewhat similar company to JDC and trades at ~44x 2021 EBITDA with expected revenue growth of 18% y/y. At 40x 2021 EBITDA, JDC would be worth ~e24 and its EBITDA should grow faster as is still subscale unlike Hypoport.[x]
Further upside could come from accretive acquisitions of other broker pools as the German insurance market is highly fragmented and needs to consolidate as increasing technical requirements require investments that are past the capability of a lot of smaller players. There are significant synergies in these deals as JDC rips out most of the costs when the put the broker pool on their existing platform. As CEO Grabmaier discussed in an interview[xi]:
procontra: If all we need is the large pools, can we expect consolidation in the pool market in the next few years?
Grabmaier: In any case, I expect that smaller competitors and special pools will lean on or merge with the big ones. It simply makes no sense to keep all developments in IT and processes or even the daily data and document supply for a relatively lower business volume. Work-sharing value creation therefore corresponds to the industrial logic. Whether there will be mergers or rather cooperations will be revealed.
procontra: What role will JDC play in this?
Grabmaier: We see JDC as a driver of consolidation in the pool and platform market. On the one hand, with our advisor tech and platform strategy and the aforementioned modern tools and features, we are ideally positioned to be one of the leading aggregators and to take ever larger partners to our platform. On the other hand, we are still looking for suitable M&A partners: The acquisition of the KOMM investment pool and the cooperations we have entered into so far with large company-linked intermediaries and banks underline our ambitions.
Downside
FY 21 EBITDA is expected to be at least 7mln or almost 40% growth compared to FY 20 EBITDA. If we capitalize that EBITDA at ~15x, then JDC would be worth ~e8. A 4% FCF yield on FY 21 would be ~e7. I think those are conservative numbers because we are using earnings while the company’s business is still very immature.
[i] JDC Group - executive interview | Edison (edisongroup.com)
[ii] JDC March 2021 Presentation
[iv] JDC Group wins leading multibanking app Finanzguru as new platform customer; 2/9/21
[v][v] JDC subsidiary Jung, DMS & Cie. concludes exclusive partnership agreement with Sparda Bank Baden-Württemberg; 3/26/19
[vi] Tegus Transcript;3/10/21 posted with permission
[vii] https://www.cash-online.de/berater/2019/grabmaier-exklusiv-so-bleibe-ich-auf-kurs/491116
[viii] Great West-JDC Press Release- 3/26/19
[ix] JDC March 2021 Presentation
[x]Based on Bloomberg data as of 3/17/21
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Recent customer wins begin to generate revenue
Accelerating top-line growth drives re-rating
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