The plan by Marwyn Acquisition Company II Ltd (LSE:MAC2) to build the UK’s leading specialist pensions administrator offers "strong value creation ahead", said broker Panmure Liberum.
Last Friday the acquisition vehicle announced its first purchase would be award-winning SIPP provider InvestAcc, for which it has raised £36 million to secure the deal, kickstarted by a cornerstone investment from Marwyn and the vendors themselves.
InvestAcc has £4 billion of assets under administration, a high proportion of sticky and recurring revenues based on a 96% retention rate, double-digit organic growth and a 30-year industry track record, analyst James Allen noted, saying its earnings are "high-quality" and that recurring fees are "not linked to markets".
He said this first move is "a great foundation" and sees "strong value creation ahead as M&A accelerates".
"An acquisition strategy makes sense given a fragmented SIPP market, succession issues at the specialist providers, the fact the full SIPP market is typically non-core for the insurance firms and platforms, and that other listed consolidators have been taken private with a shift in focus."
Management has already identified more than five M&A opportunities beyond InvestAcc and the analyst said he believes the company could deliver at least £20 million of underlying profit (EBITDA) by the end of 2027, if not sooner.
With the SIPPs one of the fastest growing components of the UK pension market, expected to swell from around £500 billion now to nearer £750 billion in the next five years, MAC2 will be "well placed to take advantage of this trend", with structural trends from an ageing population, regulatory change and the decline in the number of defined benefit pension schemes.
Several risks to the investment case were pointed out by Allen, including a likely cost increase as the M&A strategy progresses, which could depress cash generation.
Also cited was the integration risk given the number of businesses likely to be acquired in short order and that the target of 30% cost savings might be too aggressive.
At the same time, potential dilution from the long-term incentive plan was flagged along with the FCA’s consumer duty initiative and a possible lack of liquidity post-completion.
The broker's forecasts point to an "achievable" three-year earnings per share compound annual growth rate of at least 50% out to 2028, based on a consideration split of 25% shares, 50% upfront cash and 25% deferred consideration.
This implies a look-through price-earnings ratio of less than 5 times 2028 forecast earnings, helping Panmure Liberum initiate at a 'buy' rating.