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UBM's shares to catch up with events

A transformational acquisition and a focus on large, lucrative events should fuel growth at UBM.
December 10, 2015

We think UBM (UBM) is poised to stage a comeback. The events giant's acquisition of US peer Advanstar last year, funded through a £545m rights issue, has made it the dominant player in multiple markets and promises significant revenue and cost synergies, while management's focus on large, lucrative events should galvanise growth and improve both revenue visibility and cash generation. The group is also in preliminary talks to sell PR Newswire and we think that becoming a pure-play events company could prompt a re-rating of the shares. And added to this attractive mix is a tidy forecast yield of 4.3 per cent.

IC TIP: Buy at 502.5p
Tip style
Value
Risk rating
Medium
Timescale
Medium Term
Bull points
  • Advanstar deal should boost growth
  • Shares are cheaply rated
  • Forward yield of 4.3 per cent
  • PR Newswire sale could spark re-rating
Bear points
  • Exposed to Chinese slowdown
  • Poor first half for two divisions

UBM's 'events first' strategy centres on organising large events, such as Black Hat, MAGIC and Hong Kong Jewellery and Gem Fair, while moving away from smaller shows. This focus helped to widen the adjusted operating margin of the group's more than 118 annual events by 1.7 percentage points to 30.2 per cent in the first half of 2015. Management expects further progress in the typically stronger second half, when many of the larger shows take place. Indeed, forward bookings for the 20 largest events of 2014 were up 9 per cent on 30 June, driving deferred events revenue up 26 per cent to £317m in the space of six months.

 

 

There were other positives in the first half. The £600m acquisition of Advanstar contributed to a 28 per cent increase in constant-currency first-half annual events revenue. The group also reported strong growth in emerging markets where it generates about two-fifths of revenue, of which China accounts for about 70 per cent. Management also said it expects the integration of Advanstar to generate $10m (£6.7m) in cost synergies in 2016 - a year earlier than expected - and has identified a number of potential revenue synergies. About £15m has been earmarked for investment in the core business between 2015 and 2017, which should also contribute to cost savings.

UBM's efforts to focus on larger trade shows saw it sell two events and discontinue 37 others in the first half. It also shelled out £40m to acquire three events, including Hospitalar, a Latin American healthcare trade show that drew around 95,000 attendees in May, and CSTPF, a digital textile printing show in Shanghai. Those shows have boosted the group's exposure to emerging markets.

While the dilution effect of the rights issue accounts for a temporary fallback in EPS, growth forecasts look encouraging beyond the 2 per cent EPS rise pencilled in for 2016, with broker Investec forecasting 9 per cent growth come 2017. But the shares' rating of 13 times forecast earnings for 2016 and prospective 4.3 per cent yield suggest the market is not hugely enthusiastic about these prospects.

While we'd expect the shares to re-rate as growth comes through, the sale of PR Newswire could speed things up. There are no guarantees discussions over the sale will result in a disposal, but Liberum thinks the news agency could fetch over £500m if a deal goes ahead. That would allow UBM to pay off its entire debt, as well as providing the funding for further acquisitions and possibly a return of cash to shareholders. The increased focus on events should also create more investor interest. All of this should more than offset the earnings hit of about 10 per cent that a disposal is expected to create.

Investors may be concerned by flat first-half sales at PR Newswire and lower revenues from the 'other marketing services' division - together two-fifths of first-half sales. But trading is expected to improve in the second half and any challenges are outweighed by the potential of the events business.

UBM (UBM)
ORD PRICE:502.5pMARKET VALUE:£2.2bn
TOUCH:502.5-503p12-MONTH HIGH:585pLOW: 442p
FORWARD DIVIDEND YIELD:4.3%FORWARD PE RATIO:13
NET ASSET VALUE:179p*NET DEBT:63%

Year to 31 DecTurnover (£m)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
201276914647.526.7
201379416141.621.1
201474615838.221.3
2015**96920638.021.5
2016**97121138.921.7
% change-+2+2+1

Normal market size: 3,000

Matched bargain trading

Beta: 0.78

*Includes intangible assets of £1.61bn, or 363p a share

**Investec forecasts, adjusted PTP and EPS figures