Relx (pronounced relics) is a multimedia company with more moving parts than a Swiss watch. But the ingredient that has excited the stock market is artificial intelligence (AI), driving the shares from £24.80 last August to a £33.50 all-time high last week. They were recommended in this column last October at £28.32.
The commitment to AI goes back years, understandably as it is such a natural fit with the group’s established position as provider of information-based analytics and decision tools for professional and business customers in science, law and financial fraud. The chief executive, Erik Engstrom, said: “We are confident that our ability to leverage AI and other technologies, as they evolve, will continue to be an important driver of customer value and growth in our business for many years to come.”
What has changed is that AI has reached a critical mass as a commercial tool. Although providers and users have only scratched the surface of the potential, we can expect shares in companies such as Relx to benefit from future developments.
Reported operating profit rose from £2.3 billion to £2.6 billion, on the back of an 8 per cent gain in revenue to £9.1 billion. Earnings per share rose 11 per cent, from 102.2p to 114p.
The company has four divisions: risk, STM (scientific, technical and medical), legal and exhibitions. The first two dominate, contributing about a third of turnover each, legal a fifth and exhibitions the remaining eighth.
Risk covers financial crime, compliance, digital fraud and identity checks for banks, insurance and general business customers, with smaller operations in data services for commodities and aviation, and analytical tools for government departments.
STM sells mainly to universities and governments, with a useful old-tech sideline in which academics pay to have their pet learned articles published. While those divisions are enhanced by AI, lawyers are seizing on the new facility to help them phrase questionnaires and draft court submissions.
Exhibitions is the outlier of the set, because it naturally plays on the desire for face-to-face interaction rather than screen-based activities. It has recently been growing faster than the main divisions while catching up from the deadening effects of the pandemic, but should settle in the next couple of years at the others’ annual growth rate of 6 to 8 per cent. It is a useful channel to feed customers into the company’s more technical operations. The exhibition management’s experience in dealing with human end-users might open the way for selling software direct to the public, but that does not appear to be on the agenda at the moment. Meanwhile, its products offer high value while remaining an insignificant part of business and government customers’ budgets, a nice niche.
AI will reinforce the Relx business model of low capital employed and high cash generation, highlighted in the disparity between the £61 billion market capitalisation supported by only £3.4 billion net assets. It is also reflected in 15 types of principal risk listed in the annual results statement, from data privacy and intellectual property rights to geopolitical, economic and market conditions. More than half of sales are recorded in the US, where competition can be stiff and regulation unpredictable.
But, while the present outlook prevails, investors can expect a continuation of the tradition of putting cash back in their pockets through buybacks and dividends. That must be a constant temptation to cash-hungry corporate predators, but probably not at the 35 price-earning ratio, which keeps the dividends down to a 1.78 per cent yield. However, as the payments grow, Relx will turn into an income stock for long-term holders.
Engstrom said: “We continue to see positive momentum across the group, and we expect another year of strong underlying growth in revenue and adjusted operating profit, as well as strong growth in adjusted earnings per share on a constant currency basis.”
ADVICE Buy
WHY A dependable long-term growth story
Centrica
Like the water companies that reported on Wednesday, Centrica has unavoidable social and political dimensions that investors should factor into their calculations.
Top of the FTSE 100 share price risers at one stage yesterday, the market clearly liked the balance struck between a rebound in its British Gas retail profits and the emphasis on customer support through cash handouts and more customer service staff.
The price of heating has been perhaps the most toxic aspect of the cost of living crisis, worsened by reports of meters being locked for non-payment. So the company had to tread carefully in announcing an increase in British Gas and related profits from £94 million to £799 million for 2023, largely through the higher regulatory price cap. Bad debts jumped from £297 million to £541 million, partly through suspending field debt collection, otherwise known as knocking on doors. Complaints were down from 2.2 per cent of customers to 1.7 per cent last year.
It was possible to sense the management’s relief that there was also less bullish news in the shape of profits decline from £2.7 billion to £1.9 billion in business operations, thanks to the dearer raw material trading prices which the retail side could pass onto the customer. The chief executive, Chris O’Shea, could be forgiven for dreaming of a demerger in which someone else would take on the thankless task of heating homes. But O’Shea, a pragmatic and unruffled Scot, insists that is not under consideration and also claims he has no concerns about which party wins the forthcoming general election.
Instead, he is concentrating on diverting surplus profits into gas and electricity storage and generation by any means, from solar to hydrogen, in the UK, Ireland and Europe, giving the group fashionably green credentials.
The year’s dividend is 4p, up 1p, for a 2.9 per cent yield, a cautious payout against basic earnings of 33.4p a share, which translates into a 4.1 price-earnings ratio.
After a four-year gain from 31p to 167p, the shares are due a pause ahead of what may be a year of consolidation.
ADVICE Hold
WHY No rush to buy
