Illuminating financial markets is bread and butter for Euromoney Institutional Investor, but the financial publishing and data group is having more trouble communicating the benefits to be gleaned from its strategic shift.
Investors should hope the board continues playing hard to get. A fifth all-cash offer of £14.61 from private equity firms Astorg Asset Management and Epiris is 34 per cent higher than the share price, but that premium looks less fat when compared with the three-year average prior to the 2020 market crash, which would represent a 23 per cent premium. It is also 3 per cent below a 2019 share price peak. The credible prospect of growing revenue and expanding margins should deter investors from being tempted to take the offer if it appears on the table in its current form.
The FTSE 250 constituent might take its name from Euromoney magazine, founded in 1969, but print is the past and publishing accounts for less than 5 per cent of group revenue. A tilt towards providing data to finance professionals has helped propel subscriptions revenue to about 70 per cent of the total, across its three divisions.
The steady cashflows generated by recurring subscriptions grew by 8 per cent in the first half of the financial year. The level of cash thrown off by the business means that for a private equity buyer there is also ample opportunity to increase the debt, given it sat with a net cash position of £12.5 million at the end of March. The business has become strongly cash generative, with 90 per cent of adjusted operating profit converted into cash over the first half of the year, which is expected to move higher later this year.
By 2025, management is targeting high single-digit to double-digit revenue growth and margins reaching the high twenties. Those targets look achievable, as the proportion of subscription revenue rises and the events business, almost a quarter of overall revenue, recovers post-pandemic. Events revenue recovered to just over three quarters of the 2019 level and is expected to regain more ground this year. So, too, should the asset management division, which provides investment research to institutional investors and has returned to subscription growth. The higher-margin Fastmarkets business, which provides price reporting for raw materials such as wood and metals, and the financial and professional services division, with services such as vetting ultra-high-worth people for compliance reasons, provide steady earnings.
If you take heed of improving revenue and margins, the £14.61 offer looks paltry. Take those into account and the offer price should be much higher. Based upon analyst forecasts for improving revenue, profitability and other metrics over the next four years, as well as the potential for cash returns of about 145p for shareholders, Euromoney could warrant a price tag of £19.97, reckons Canaccord Genuity.
Even without the return of surplus cash, and accounting for the inefficiencies created by retaining cash on the balance sheet rather than spending on acquisitions or new products that could raise earnings, an offer of £14.96 is the least investors should expect, say analysts. Investec reckons bidders could stump up £17 and still make an internal rate of return of more than 20 per cent by 2025. It forecasts a rise in revenue to £398 million this year from £336 million last year and operating profit of £81.8 million, from £65.3 million.
The Takeover Panel has given the consortium until July 18 to announce a firm intention to make a bid or withdraw. Investors should hope the board continues holding out for a better offer before recommending.
ADVICE Hold
WHY The price on the table does not reflect progress on growing subscription revenues or the chance of improving margins
Civitas Social Housing Reit
A dividend yield of 6.9 per cent, backed by leases of about 25 years with an inflation link, what’s not to like about Civitas Social Housing Reit? In short, the fact that the income stream, and the dividend paid out of it, is actually less secure than might be assumed for a landlord whose rental payments are ultimately funded by local government.
The social housing Reit (real estate investment trust) is struggling to pick itself back up after an attack by the short-seller Shadowfall, which alleged, among many other gripes, that many Civitas tenants were in “significant financial difficulty”.
Civitas has emphasised the “long-term structural demand” for its homes, which house adults with learning or physical disabilities and mental health problems, as well as its ability to reassign leases in the event a housing association runs into financial trouble. Still, investors are unnerved. The shares trade at a 26 per cent discount to the Reit’s net asset value at the end of March.
Civitas leases homes to housing associations, who recoup rents from local authorities. But this produces a mismatch between the 25-year lease the housing association is tied into with Civitas and the annual settlement they receive from the government.
A new draft clause is set to be introduced, which would allow a housing association tenant to only pay what they can if they have a shortfall in their own income.
The clause is designed to address the “technical mismatch” that has come under renewed scrutiny by the regulator. But that leaves the risk that Civitas is still forced to impair rent that a tenant cannot meet. Last year, rents were collected as expected and net rental income rose by 6 per cent.
Unlike Reits such as Impact Healthcare Reit and Target Healthcare Reit, which lease properties to care home providers, Civitas does not produce a rent cover figure either, which makes judging the financial strength of tenants more difficult. A low level of diversification amplifies the risk of any tenant running into difficulty, with the Reit’s leading three tenants accounting for more than half the company’s rental income.
ADVICE Avoid
WHY Concerns around security of income stream
