Personal Group (PGH) - low valuation despite momentum in many growth drivers
There's been a step change in momentum here over the last few months, and I suspect a big beat to FY24 forecasts is on the cards
New holding - bought mid-May at 171p. A medium sized (5-10%) holding.
Firstly, apologies for the radio silence over the last few weeks since I published an article on Spectra Systems at the end of April. It has been a hectic May for me. I also have not had a chance to publish a monthly performance wrap-up for the month of April. I will do a combined Apr & May wrap-up in early June.
As I just bought Personal Group, I have decided to do a quick write-up. This will not be as detailed as my usual company analysis articles, but I will lay out the main pros and cons as I see this share, and why I think there is huge compelling value here, both short and medium term.
A brief summary of what they do
Personal Group is a company that provides a range of employee benefits. From hospital medical cash plans to death benefit plans, employee perks (eg discounts and other benefits) to discounted IT hardware and software. Their customers comprise large corporates (such as Royal Mail, Kingfisher) to SMEs. However, they don’t make money from their customers - their revenues and profits come from the end users, who are employees of those companies.
The majority (58%) of their revenues come from their insurance products, of which there are two main ones: hospital medical cash plans and life insurance plans. Insurance makes up a bigger proportion of EBITDA than 58%, as it is at a 39% EBITDA margin (compared to 23% for all the other divisions combined).
What sets Personal Group apart from other insurance and benefit service providers is that they have a large field sales force that visit employer premises to sell the insurance products face-to-face. Therefore, many of corporate clients have a large blue-collar employee base - the likes of Royal Mail and Kingfisher. While this seems like an antiquated way of sales, the fat margins (which I will get into later) makes this work. They have access to 1.6m employees in the UK, which is quite a sizeable number.
The rest of their revenues (42%) come from three other key services:
Hapi - an online platform for employees to access a range of discounts and benefits.
Consultancy Services - a small part of Personal Group, providing HR and benefits consultancy services to employers
Let’s Connect - an online shop for employees to purchase discounted IT hardware and software
Summary: why I’ve invested
Broker forecasts for FY Dec24 look conservative - I think there is a high chance of upgrades. Cavendish are forecasting only a 6% increase in EPS, but ARR (which is over 75% of revenues) is already running +14% ahead YoY. There is also some compelling short term growth drivers (expanded below), so I can really see Cavendish increasing forecasts once we get a HY trading update in June-July.
Insurance sales to accelerate - I have been digging into their LinkedIn profiles and tracking numbers over the past year, and I suspect they have aggressively grown their field sales force, in the region of 20-30% YoY. Their “total addressable market” - ie employees of their customers - have also grown from 1.4m to 1.6m in a year, which is a +14% growth rate. In a recent results call, management said they only had 12% penetration for their insurance products, so even moving a few percentage points more results in healthy double-digit revenue growth rates. In addition, many of these blue-collar employees are seeing a big boost in their wages from Apr24, due to the minimum wage increase. Some of that will inevitably go into buying these hospital cash plans and death benefit plans.
Version 2.0 of Benefits Platform Hapi launched - they have been investing into v2 for a while, and now launched in early 2024, and should be a tailwind to FY24 revenue growth. Hapi was only 16% of total ARR in FY23, but I suspect every extra marginal pound of revenue is very profitable, given it is a tech platform that has very little incremental cost for each additional corporate customer or employee end user.
Margin expansion pretty certain for FY24 - operating margin for FY23 was only 10.6%. Lower than the 15-19% seen in 2018-2019. This was because last year, new customers made up a bigger than usual proportion of the insurance base as face to face sales fully returned to normal, driving that +14% ARR growth. First year margins are low due to that F2F touchpoint, but subsequent renewal years are higher margin. In addition, last year saw continued high claims volume on the hospital plans, as the NHS ramped up their tackling of the covid backlog. Claim volumes should start to moderate back to historical norms in FY24. The company had provided an estimate of £1.2m extra profit with normalised claim volumes, which is an additional +3.8p EPS. Quite a meaningful extra when FY23 EPS was only 15.1p!
Good growth momentum - in terms of companies signed up as clients. They don’t disclose the total number of companies they have contracted, but the +14% YoY growth in end users (1.6m at Dec23) is pretty healthy. In addition, they won many more new accounts in H2-23 (81 new wins) compared to H1 (52 new wins). Tone of voice from management, whether webinar or text RNS, have been positive. Also, digesting through the last few updates, it seems there is some good momentum across the business, so FY24 should see some solid double-digit growth again both in corporate customers as well as employee end users.
Potential exciting medium term growth strategy - a new CEO, Paula Constant, joined mid-2023 and has indicated that she is soon to reveal a medium to long term growth strategy in early summer. It is probably a safe bet to assume that the strategy will involve three things: (i) new insurance-type products added to the portfolio, (ii) driving more penetration and growth of the Hapi tech benefits platform, and (iii) potentially more services/benefits for corporates/employees.
Risks to be cognisant
Insurance mis-selling - this is the big one for me, especially as most of their sales are face-to-face. Inevitably, there are always quality control challenges with F2F selling. However, I have dug through many years of annual reports and news of Personal Group, and not found any whiff of issues. But it is an ever-present risk.
Insurance price gouging - the regulators increasingly are clamping down on “unfair pricing”. A problem, as Personal Group seems to be making huge profit margins. Their “claims ratio” is only 27%, which I think means that for every £1 of premium, they’re making 63p in profit? I know from looking at other insurers such as Direct Line (I hold), claims ratios in motor and home are usually 85% to 90%. So this high level of profitability might attract the scrutiny of the insurance regulator.
Unknown customer concentration - it is unknown if they have a client concentration risk here. One of their largest clients, Royal Mail, has 150,000 employees. Which is just under 10% of PGH’s total base (1.6m as of Dec23). So potentially, there is some concentration risk here. From their risk management section of their annual report, there is an implication that one (or more) clients represent more than 20% of revenues. If that client is Royal Mail, at least the risk is mitigated for the next 3 years, as they have just renewed the contract in 2024.
The potential I see
I get excited when I can see a tangible pathway to top-line growth as well as operating margin growth. And there is plenty of opportunities here to plug into future estimates:
ARR is up +14% YoY as of Dec23 (and ARR is a key chunk of revenues, at 75% of total in FY23)
Hapi v2 platform launch, should drive further top-line growth
Higher rates of insurance and benefits uptake, as April’s minimum wage increase feeds through to employees’ pockets
Winning more clients, driving a bigger “Target Addressable Market” of employee end users for both insurance and benefits
Insurance claims ratio to improve, driving margins growth
Insurance new/renewal mix to improve, driving margins growth
More interest earned from healthy cash pile (I estimate an additional +0.8p EPS this year just from this)
Based on all the above, I can actually see a credible base case where FY24 EPS might actually come in closer to 20p rather than the 16p that brokers have forecasted. With a clear growth story and momentum, as well as being a high margin insurance+tech hybrid type of company, Personal Group could easily be able to command a PE ratio of c13x. Insurance is normally at 8-10x PE and a solid growth tech at 15-20x PE, so 13x seems about right. That would give a 260p target share price, on FY24 forecast of 20p EPS. Representing a 49% possible share price gain within 6-9 months once FY24 results are clear. And that is before taking into account the c£20m net cash pile they have, which currently makes up 35% of the market cap.
Thank you Dave!
Interesting perspective, and I think I am going to allocate some time this week to educate myself more about this potential risk area, to make sure I'm comfortable with my continued holding of PGH.
Hi nice blog, interesting share. FCA are certainly clamping down on what they see as uncompetitive add on products. On the positive side, the products they are offering are more mainstream than the likes of Gap which FCA recently targeted. However the claims ratio you mention will potentially flag with the FCA which could result in intervention down the line, and certainly their internal compliance would need a record of why this product benefits customers and offers "fair value". So watch the FCA newsflow as any action on the insurance products will most likely get flagged in advance.