For corporate giants, one of the biggest challenges can be lifting pedestrian rates of growth — just ask Alan Jope, the boss of Unilever, the consumer goods group. Relx, however, thinks it has hit a turning point.
A shift towards selling more sophisticated data and analytics tools alongside its traditional subscription-based research materials should result in higher underlying rates of revenue growth this year for its scientific, technical and medical (STM) and legal divisions, compared with historical norms. According to analysts at Barclays, that implies organic growth of 5 per cent for the three main units of what is Europe’s largest media information and analytics specialist.
Trading figures last year gave a glimpse of the benefits to be had from that shift. Underlying revenue growth for both STM and legal were 3 per cent, ahead of the pre-pandemic rate. That lifted the overall organic growth rate to 7 per cent, though foreign exchange headwinds contributed towards full-year figures being slightly short of some analysts’ expectations, which explains a 3 per cent knock to the share price on results day.
The aim is to boost the rate of underlying gains made by STM and legal — historically between 1 per cent and 2 per cent — closer to those of the risk division, typically between 7 per cent and 8 per cent annually. That includes things such as offering analytics tools alongside access to legal research texts, designed to inform those in the profession over whether they should take a case or the best jurisdiction in which to bring a court action, for instance. Roughly 25 per cent to 30 per cent of income generated by those businesses is now coming from selling analytics services, which is driving faster revenue growth.
Demand for print materials is still in decline, but, given that electronic products account for almost 90 per cent of the total, that should become less of a drag. Analysts at Numis forecast a step up in organic revenue growth to 13 per cent this year.
Those hints of improvement are reflected in the group’s near-peak valuation. Investors are willing to pay a higher price for the reliability of subscription resources, which partly explains Relx’s rich valuation of just over 26 times forward earnings. Then again, that’s still a sizeable discount to Informa, which trades on a forward multiple of 37 and earns a greater proportion of revenue from the bumpier events industry.
Recovery in events, which produced 16 per cent of revenue pre-pandemic, remains one of the chief uncertainties for Relx. Revenue here was up by almost half on the previous year, but was still 58 per cent below the 2019 level. The timeline for full rehabilitation will depend on the pace at which pandemic restrictions are lifted.
Net debt equivalent to 2.4 times earnings before interest, tax and other charges put leverage at the top end of Relx’s desired range at the end of December. But being light in capital intensity and highly cash-generative has meant a record in returning cash via buybacks. After a blip last year, that programme is set to resume, with £500 million in purchases planned this year, ahead of the £300 million anticipated at Barclays. The dividend for last year was lifted to 49.8p a share and this year’s payment is set to hit 52.4p.
Yet a potential yield of 2.5 per cent is hardly much to get worked up about, particularly against the backdrop of rising bond yields. Indeed, while the shares have risen by almost a quarter over the past 12 months, rising rates and a shift out of high-priced stocks have precipitated a sell-off in Relx since the start of this year. There’s not too much to get excited about at the present price.
Advice Hold
Why A rich forward earnings multiple already accounts for the improvement in underlying revenue growth
B&M European Value Retail
It’s little wonder that retailers have fallen out of favour with investors, what with supply challenges and inflationary pressures assailing them on all sides. B&M European Value Retail has been caught up in the recent stock market sell-off, with its shares now 13 per cent lower than they were at the start of this year for a price/forward earnings ratio of just under 14, at the lower end of the five-year range. What hope do budget retailers — whose main advantage is price, after all — have in offsetting rising freight costs and wage inflation?
B&M hasn’t announced wholesale price increases yet. Instead, it reckons its supply arrangements will be the key defence in combating cost pressures and maintaining its price advantage. The retailer buys “narrow but deep”, negotiating a better deal from manufacturers by buying fewer product lines but in higher volume. It also deals with very few distributors, instead sourcing products directly from manufacturers.
So far, it’s managed to keep on an even keel and last month it upgraded profit guidance for this year to between £605 million and £625 million, from the £578 million anticipated by the market. Liberum expects the operating margin to moderate from last year’s peak of 11.8 per cent as sales growth eases against the exceptional levels recorded during lockdown. But, at 11.4 per cent, it still expects this year’s margin to be above the pre-pandemic level.
There are two ways of thinking about the potential impact of a squeeze on consumers’ spending: on the one hand, it could entice more customers towards discount retailers; on the other, higher costs are likely to have a disproportionate effect on lower-income households, which make up the core of budget retailers’ customer base. Analysts at RBC Capital think it will reduce the level of discretionary spending at discount retailers.
The company is highly cash-generative, which has resulted in some pretty generous cash returns via a mix of special and ordinary dividends. Liberum expects dividends to total 41p a share, equivalent to a potential yield of 7.3 per cent at the present share price. It’s not just B&M’s wares that are cheap.
Advice Buy
Why A good dividend on offer at a bargain price
