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TEMPUS

Move to AI provides winning formula for Relx

The Times

Science is big business, as Relx can testify. The former Reed Elsevier reported yesterday that pay-to-publish was growing “particularly strongly”after the company published more than 150,000 articles last year on that basis, 26 per cent more than in 2021.

This is only a small part of Relx’s scientific, technical and medical (STM) division, which accounts for just a third of the group’s overall revenues. But it shows how the company’s modern cloud-based garb, distributing and analysing ever-increasing shoals of data, has roots in traditional publishing.

The stock market took in its stride a third-quarter trading update showing underlying revenue growth of 8 per cent in the first nine months of the year, with the expectation that revenue and adjusted operating profit will remain above trend, “driving another year of strong growth in adjusted earnings per share on a constant currency basis”.

This follows from a half-year report in July that showed adjusted pre-tax profit 12 per cent higher at £1.35 billion and an interim dividend fattened by 8 per cent to 17p a share. Since then the shares have risen from £26.61 to above £29 at one stage last week.

Relx is perhaps the least well known of the companies ever-present in the FTSE 100 index since it started in 1984. It is hard to overestimate the transformation in that time, from a book and magazine publisher to its present model as a global provider of analytics and decision tools, rapidly becoming one of the most sophisticated users of artificial intelligence.

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Essentially, it is about a move from print to digital communications, a common enough story. But Relx has used electronic formats to develop its ability to analyse and manipulate data, interacting more closely with customers, mainly governments, academic bodies and commercial organisations. It employs more than 5,000 software engineers and a similar number of other technologists who scour data and apply algorithms such as machine learning and AI to turn it into a form that professional customers can use. Turning the tables, some academics are using AI to write the articles they submit.

Relx has four divisions: risk, STM, legal and exhibitions. The first two each account for a third of turnover, legal a fifth and exhibitions the rest. Risk has been rising at 8 per cent this year, STM by 4 per cent, legal 6 per cent and exhibitions, the smallest, at 32 per cent as it recovers from the pandemic. This operation has resisted the trend to online and virtual experiences, because trade buyers and sellers still prefer to deal face-to-face. But an increasing amount of peripheral information, such as exhibition attender lists and contact details, is going electronic.

Relx prefers to sell its identity and anti-scam software through banks, insurers and other companies, rather than directly to the public. Given the small marginal costs that would be involved in converting, that may be an opportunity going begging. The company may not want to offend corporate customers, but that would not be an insuperable hurdle with an innovative marketing campaign.

Investors should keep an eye on one result of basing the business model on so much intellectual property. At the end of last year goodwill and intangible assets exceeded the group’s total net assets, £11.8 billion against £11 billion. The amortisation of those intangibles is a key factor in the adjustments that result in the adjusted profit and earnings figures; so much rests on the audit committee to see that they are valued fairly. There is no reason to think otherwise, working on the basis of what those assets earn, but if the company were to hit turbulence that might become a sensitive area.

Earnings per share should rise from 102.22p last year to 110p for 2023, then 120p and 130p in the next two years, taking the price to earnings ratio down to about 20 and the dividend yield to 2.6 per cent.
ADVICE
Buy
WHY
A well-managed entry point to benefit from AI

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Rentokil Initial

Rentokil Initial likes to say that its businesses are largely recession-proof. When we want to be rid of pests, we will find the money, it believes. After Parisian bed bugs hitched a ride to Britain in rugby fans’ backpacks, for example, the phones started ringing.

Yesterday, though, Rentokil admitted that residential demand had slowed. While American homeowners might panic when they see unwelcome visitors, they are not rushing to take out regular contracts in advance. That took the stock market by surprise and the shares fell sharply when trading began. After a pause they resumed sliding to end the day 18.6 per cent lower. That’s an extraordinary response in the stock of a substantial, well-researched company.

It may not be pure chance that the problems stem from the United States, because Rentokil is still sorting out Terminix, acquired for $6.7 billion last year in what was described then as “a genuinely game-changing transaction”. All is going well on the surface, but the fear is that the sales blip signals something deeper. Overflowing Terminix stockrooms may have been uncovered.

Pest control is the biggest part of the group, with £2.5 billion in revenue last year, compared with £807 million for hygiene and wellbeing and £193 million for workwear, which is confined to France and may be for sale before long. Operating margins of all three units are in the high teen percentages. Pest control was up a like-for-like 3.8 per cent in the July-to-September period, hygiene was up 5.7 per cent and workwear was up 12.2 per cent. Europe was the best regional performer. Andy Ransom, the chief executive, argues that the business has “a proven, effective strategy to deliver organic growth, focused on strong customer relationships and service quality” and lauds the group’s global business portfolio.

Even after yesterday’s fall, the shares still sell at 21.1 times likely 2023 earnings, which seems a little rich to be buying into just now.
ADVICE
Hold
WHY
More work to do on merging Terminix

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