Perish the thought, but is Relx losing its ability to be stable and reliable? The data and analytics specialist, which used to be known as Reed Elsevier, is renowned for delivering steady earnings growth and has become a mainstay of many institutional investors’ portfolios.
But this year the doubts started to creep in. Relx reported underlying growth in revenues of 3 per cent in the six months to the end of June against hopes among some analysts of 4 per cent, who had expected a better performance in its scientific, technical and medical division.
This prompted some City scribblers to speculate that Relx was relying on acquisitions to underpin growth. It also led to concerns that a resurgent Thomson Reuters could represent a competitive threat in the US legal publishing market.
So could life be about to become unwelcomingly exciting for Relx?
Reed Elsevier was formed in 1992 through the combination of a British book and magazine publisher and a Dutch scientific publishing house. It changed its name to Relx in 2015.
The group publishes scientific and medical articles and journals, sells data and analytics — some of which is compiled using its trade titles — provides information and analysis to the legal profession and mounts exhibitions and events such as Vision Expo and the Fibo for fitness experts.
The modern version of Relx is a world away from its previous incarnation as the publisher of New Scientist and Computer Weekly and is motivated by the move towards all things digital among companies, academic institutions and, indirectly, consumers. Relx’s position as a global business, operating in more than 180 countries with a workforce of more than 30,000, has helped cement its position as a leading FTSE 100 company with a market value of £35 billion. With more than half of its earnings coming from North America, it also means that it is exposed to fluctuations in the dollar that can act as a drag on its sterling-denominated earnings.
The pressure on Relx is undoubtedly real. It may be a market leader, but the world of data and analytics, specialist publishing, and indeed conferences and exhibitions, has become increasingly crowded. Thomson Reuters, back in growth mode, could feasibly start to eat into the group’s share of the US legal market, which is gradually going digital and welcoming developments in technology.
In fairness to Relx, the ship is still steering its steady course at the moment. After disappointing analysts and investors with its first-half numbers, the group returned to form in October, reporting that growth over the nine months had come in at 4 per cent.
If Thomson Reuters’ software is a renewed threat to Relx’s Lexis Nexis research business, it hasn’t as yet shown through in the divisional performance, where underlying revenue growth at the legal arm held firm at 2 per cent over nine months.
Growth at the scientific, technical and medical unit and the risk and business analytics division was also stable and edged a percentage point higher in exhibitions.
The group bolstered its earnings growth with regular share buyback programmes — which reduce supply and have the technical effect of lifting the price — worth £400 million in the first half and a further £200 million in the second six months. Again, there is every suggestion that this will continue.
When this column recommended buying into Relx in February, the shares were priced at £17.12½, since when they have gained about 5.5 per cent. Up 1p, or 0.06 per cent, to £18.14 yesterday, they trade for about 18.9 times Investec’s forecast earnings and carry a dividend yield of about 2.6 per cent.
Advice Hold
Why Little to suggest that its reliably predictable earnings increases are likely to end anytime soon
Babcock International
There are three words that carry some real weight in Babcock International’s results for the six months to the end of September, released late last month: “pipeline” and “order book”.
It is illustrative of the increased strength of the aerospace and defence group that confirmed and unconfirmed orders have hit record levels. The order book, which stands at £18 billion, was boosted by winning the £1.25 billion contract to supply the Ministry of Defence with a fleet of Type 31 frigates, while the pipeline — which ought intuitively to have shrunk after the Royal Navy’s order was confirmed — also grew by £2 billion to £16 billion and is packed with big defence tickets. There is plenty to keep this contractor busy.
Babcock International, founded as a boilermaker in 1891, began making military equipment during the first and second world wars. Listed since 1976, the group acts as a defence contractor for the armed services overseas as well as the MoD. It services vehicles and trains staff for the emergency services and it undertakes civil nuclear work, including decommissioning efforts at both Sellafield and Dounreay.
Babcock has been under the cosh for two years, haunted by the spectre of the collapse of Carillion, worries about whether it is overreliant on the MoD and the now vanished musings of anonymous analysts at “Boatman Capital”. In truth, the group looks in robust health. It has been bolstered by an improved budget for the MoD, but almost half of the pipeline consists of overseas contracts hopefully soon to be in the bag.
Babcock reckons it is on course to generate underlying revenue of about £4.9 billion for the year to March, which is impressive bearing in mind the end of a large Navy contract and lost work decommissioning Magnox power stations, and all at a highly sustainable operating margin of around 10.2 per cent.
The shares, at 574p when this column recommended buying last November, were 1½p or 0.3 per cent up at 597½p, making for a modest gain of just 4.3 per cent. Priced at just 8.3 times Liberum’s forecast earnings for a dividend yield of 5.1 per cent, though, they remain a bargain.
Advice Buy
Why Undervalued, with an improving balance sheet and plenty of prospects
