UBS initiates coverage on XPS Group with “buy” rating, sees 30% upside

Investing.com -- UBS initiated coverage on XPS Group (LON:XPS) with a “buy” rating and a 12-month price target of 480p, representing a 30% upside from the July 4, share price of 367p. 

The report dated Tuesday flags XPS as a high-quality, cash-generating midcap operating in the U.K.’s defined benefit pension outsourcing sector, supported by recurring revenues, low cyclicality, and strong EBITDA margins.

XPS reported revenue of £232 million in FY-2025 and is forecast to grow to £261 million in FY-2026 and £301 million by FY-2028, reflecting a 7-8% mid-term sales CAGR. 

Net earnings rose from £26 million in FY-2023 to £45 million in FY-2025, with diluted EPS growing from 12.18p to 20.56p in the same period. 

The adjusted EBITDA margin reached 27.1% in FY-2025, while EBIT margin is forecast to rise from 25.4% in FY-2026 to 28.3% by FY-2030. 

The company has increased its dividend per share from 8.40p in FY-2023 to 11.90p in FY-2025, implying a five-year DPS CAGR of 13%. 

The dividend yield is expected to remain around 3.4%–5.0%, with a projected equity free cash flow yield of 6.3%–9.0%. Net debt stood at £54 million in FY-2025 and is projected to shift to a net cash position of £43 million by FY-2030.

UBS noted XPS’ market share grew by 350 basis points since 2020, reaching 10%, and projected only 100bps more over the next five years, implying conservative upside. The pensions outsourcing market, valued at £2.5 billion, has historically grown at 4–5%, supported by CPI-linked pricing and regulatory project work.

UBS estimates base-case mid-term organic growth of 7–8%, but sees a “blue-sky” scenario of 35–40% higher revenue if share gains and insurance market penetration accelerate.

The February 2025 acquisition of Polaris (NYSE:PII), with £15–17 million in sales and 20 insurance clients, extends XPS’ reach into the £1.5 billion insurance consulting market. In FY-2026, total revenue growth is forecast at 12%, including 5% organic growth, with key contributions from the John Lewis (JO:LEWJ) contract, SEI master trust extension, and Polaris. 

Project revenue related to the McCloud Remedy, which contributed £10–12 million in FY-2025, will phase out, presenting a tougher comparison.

UBS also highlights valuation support. XPS trades at a 20–25% EV/EBITDA discount and a 9–12% P/E discount versus peers, with a stronger free cash flow yield. 

The 480p target price is based on a discounted cash flow model. Including upside scenarios, UBS sees potential for a 50% uplift to the price target.