Arex capital are extremely bullish... Valuation and Conclusion
JPJ comfortably satisfies both of our conditions for an exciting long investment. We expect JPJ to generate ~135p of free cash flow per share in 2019, assuming no share repurchases. At current prices, this equates to a multiple of ~6.3x and a free cash flow yield of ~16%, an incredibly inexpensive valuation for a healthy, growing business, and a valuation that we believe affords a real margin of safety against impairment of capital. Given our expectation for JPJ to grow its free cash flow per share at a mid-teens rate annually post 2019, we believe that JPJ can trade at a multiple of at least 12x free cash flow (equating to an 8.3% free cash yield), or a share price of 1620p, approximately 90% above current levels. Notably, this high valuation would still place JPJ below the average of peer valuations.
Beyond the outsized return opportunity, JPJ clearly stands to benefit from a change in narrative. The passage of time, demonstration of attractive organic growth in revenue and EBITDA, generation of free cash flow, and initiation of a return of capital will drive increased familiarity with this “new company” and will transform how JPJ is perceived. This should allow investors to fairly value JPJ equity based on its compelling business economics, free cash flow generation, and growth prospects.