A business primed to grow in a busy year for elections

These are the sorts of questions YouGov (YOU) have asked the public in recent surveys. The Aim-traded company is famous for its political polling, and elections are great for its brand exposure. However, these quick-fire studies only represent about 5 per cent of its workload. YouGov is a well-diversified data and analytics business with attractive margins and a variety of structural growth opportunities. 

A transformative acquisition 

Having focused on organic expansion for several years, in January 2024 YouGov bought the consumer panel services (CPS) business of GfK, the leading market researcher in Germany and Italy. The €315mn (£270mn) acquisition has materially increased the size of the group, with management hiking up its three-to-five year revenue guidance by £150mn to £650mn, to account for the expected contribution from CPS.

Future profits also look appealing, given that CPS has consistently achieved a cash profit margin of above 20 per cent over the past few years.

There is a risk that such a big acquisition could go sideways. One result of the deal is a pivot from net cash to net debt, with the purchase funded by a combination of an equity placing, cash and borrowings. Net debt to Ebitda now sits at 1.6-times, although the company is aiming to return to a net cash position over the long-term and analysts expect deleveraging to proceed fairly quickly.

From an operational perspective, the early signs are positive. Integration is progressing nicely, with CPS trading ahead of expectations and driving the company's adjusted operating margin up 200 basis points to 19 per cent in the latest half-year. The acquisition, in the words of HSBC, is “potentially transformative and [the] synergy upside could be significant”.

As well as boosting YouGov's presence in Europe and providing cross-selling opportunities, the GfK purchase might also encourage YouGov to pursue a US listing, given its increased scale. This in turn could drive a higher valuation. 

The US is YouGov's biggest revenue generator and a big growth opportunity. Current chair and former chief executive Stephan Shakespeare told the Financial Times last year that the group was considering moving the primary listing to New York or going with a secondary listing stateside.

Chief financial officer Alex McIntosh said on an analyst call last October that a dual listing was something they were assessing "all the time", although there haven't been any particularly bullish board noises on the issue since then. 

Underlying strength

YouGov's reporting segments have been reorganised since the acquisition into three areas. Research is the biggest division, combining the previously split out custom research and data services teams, followed by data products and the newly added CPS. (Revenue contribution is likely to look different once CPS has a full reporting period under its belt). 

The data products business has an adjusted operating margin of around 40 per cent, while research (which includes quick turnaround research and custom projects) has a margin of around 20 per cent. Having invested in technology, people and panellists in recent years, YouGov is now benefiting from operational gearing. Its work has become very repeatable and it is able to sell its data sets at ever higher margins.

A wide geographic reach, meanwhile, offers revenue and client diversity. As well the Americas and Europe, the company has exposure to markets across the Middle East and Asia Pacific. Over a third of revenue is subscription based, which helps mitigate fluctuations in demand, and the company has visibility over 75 per cent of revenue in the second half of its current year. 

YouGov always needs people to sign up to respond to surveys, but isn't having issues on that front. Its panellist numbers have been climbing at a good pace, with growth of 15 per cent in the latest interim period after £3.4mn was invested to increase capacity as the demand for custom research grows.

The group is not bullet-proof. Revenue fell by 2 per cent in the six months to 31 January 2024 in both the data products and research divisions, because of "continued pressure on client budgets and higher price competition" and "some weakness in discretionary spend on fast-turnaround research". Data products' operating profits fell 9 per cent, and were flat for research. 

However, momentum is building again. Sales picked up in the second quarter, and the group is pitching for increasingly large custom research projects. This is an encouraging sign. Meanwhile, the data products team signed one of the company's biggest contracts yet: a multi-year deal in over twenty markets with a media agency, which offers a great research cross-selling opportunity. 

Growth drivers

The medium term revenue target of £650mn, which is being pursued through a combination of organic growth and M&A, shows that YouGov is not resting on its laurels. And management clearly thinks that top-line headwinds will be temporary given the new revenue goal is almost £400mn higher than the record figures achieved in 2023.

The forecast of a 25 per cent medium-term adjusted operating profit margin, first set out at the capital markets day last year, has been maintained. 

While CPS is set to push European revenue much higher next year, the US remains YouGov's biggest market – and one of its biggest opportunities. The strategic importance of North America is reflected in the acquisition of Chicago-based data management platform KnowledgeHound in January (for an undisclosed amount). The region is highly competitive, with rivals including IHS Markit and Gartner (US:IT), but the company is making solid inroads into the market. 

There is also the artificial intelligence (AI) revolution to consider. Peel Hunt analysts argue that "those developing AI are likely to find YouGov’s wealth of high-quality proprietary data very attractive". 

New chief executive Steve Hatch told Investors' Chronicle that he was "very bullish on opportunities with AI. It will make us more efficient with scripting and coding and help deliver more predictive modelling and create new products". 

A good time to buy in

YouGov shares have lost 15 per cent of their value following the group's recent results, with the market panicking at the headwinds flagged by the board. This is short-sighted and offers the canny long-term investor a relatively cheap entry point compared to the historic valuation.

The shares trade at 20 times forward consensus earnings, a nice discount to the five-year average of 36-times even when higher interest rates are taken into account. On an enterprise value /cash profit basis, they trade at 17 times against a five-year average of 23 times. These ratings don't scream cheap, but we think they are justified by the growth outlook.

Digesting a major acquisition and expanding in North America under a new chief executive is not risk free. However, we think YouGov is a fundamentally resilient and well-run business that is cashing in on that most valuable of assets: data.