Some companies are at the mercy of investor sentiment simply because of the highly cyclical nature of their businesses and the sectors in which they operate. It doesn't matter how well they're run, how solid the balance sheet, or whether the order book is expanding - if they're suddenly on the wrong side of market perceptions then operational issues take a back seat to the macro picture, and often for good reason.
- Sentiment deteriorating
- Valuation high by historic standards
- Pressure on top-line revenues
- Likely fallaway in business traffic
- Improving profit margins
- Progress in business reorganisation
You would be hard pressed to find a better illustration of this than companies operating within the broader travel sector. Tour operators and booking platforms had already been struggling as a consequence of recent terrorist outrages, but last month's 'Brexit' has added further uncertainty to the mix. This is hardly the ideal backdrop for business-travel specialist Hogg Robinson (HRG), a company that was already facing increased competitive pressures and weak demand for its services in certain locales, most notably Australia.
But despite the concerns, the group's shares still change hands at a 7 per cent premium to their 300-day moving average. While that's hardly alarming in isolation, the rating of 9.3 times consensus next-12-month forecast earnings is in the most expensive fifth of the five-year range and well above the historic median average of 7.9. This suggests that either the group's business model is seen as particularly resilient in the current climate, or that the shares are now vulnerable to a marked correction. We think the latter scenario is more likely to play out given the deterioration in general market sentiment, so we're switching our recommendation to 'sell'.
The result of the referendum is likely to cause businesses to become more circumspect with regard to their internal spending plans, both here and on the continent. The IATA estimates that UK passenger numbers could be 3-5 per cent lower by 2020 in the wake of the vote. And the possibility also exists that in the absence of any agreement, UK citizens travelling to the Schengen area may require a tourist or business visa, further eroding confidence in the sector.
| HOGG ROBINSON (HRG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 71.8p | MARKET VALUE: | £233m | |
| TOUCH: | 71.3p-71.8p | 12M HIGH / LOW: | 76p | 58p |
| FORWARD DIVIDEND YIELD: | 3.9% | FORWARD PE RATIO: | 9 | |
| NET ASSET VALUE: | ** | NET DEBT: | £33.6m | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2014 | 341 | 35.8 | 7.8 | 2.21 |
| 2015 | 330 | 30.5 | 6.6 | 2.32 |
| 2016 | 318 | 32.2 | 7.2 | 2.51 |
| 2017* | 317 | 34.2 | 7.3 | 2.64 |
| 2018* | 322 | 36.9 | 7.9 | 2.77 |
| % change | +2 | +8 | +8 | +5 |
Normal market size: 5,000 Matched bargain trading Beta: 0.54 *Canaccord Genuity forecasts, adjusted PTP and EPS figures ** Negative shareholder funds | ||||
Uncertainty will dog European economies until there is at least some clarity with regard to the UK's trade settlement in a post-Brexit Europe, but it's difficult to say when that will be achieved. Until then, the continent's businesses are likely to remain cautious, with non-essential travel and corporate event-linked activity among the first casualties. As the UK and Europe account for two-thirds of group revenues, that's a worry.
The group managed to pare back net debt through to its March year-end, partly as a consequence of a one-off settlement of a claim in respect of the UK pension scheme, but it ended the period with negative shareholder funds and a hefty pension deficit of £258m.
