Room for rewards at the new Informa

But when, in January, the group announced that it would be spending £3.6bn on its events-focused peer UBM, shareholders responded badly. We shared some of the  concerns. The merger – which completed in March – raised mid-year net debt to 3.1 times adjusted cash profits (Ebitda) and integration is expected to cost roughly £100m. And yet, if the group can manage this acquisition effectively, it has the potential to be transformative. The ‘new Informa’ owns the biggest events company in the world, two world renowned academic publishing brands and a leading knowledge and networking business.

Importantly, UBM fits well with Informa’s strategy to focus on events, which broker JPMorgan has described as the “preferred sub-sector in media” because, “you can’t ‘Amazon’ the events business”. In the last few years, UBM has shifted its portfolio through asset sales and acquisitions, so 85 per cent of revenues came from events in 2017 following 22 per cent growth to £866m. UBM is expected to contribute £629m to the new Informa in 2018, rising to over £1bn in the first full year of ownership. This means the enlarged group will obtain over half its revenue from events, which lowers its exposure to the fickle print publishing industry and increases the proportion of forward bookings. Over 65 per cent of ‘new Informa’s’ revenue comes from repeating, predictable sources.

The underlying group is also ticking in the right direction. Organic revenue growth at Informa increased from 0.7 per cent in 2014 to 3.4 per cent in the last financial year and is expected to hit 4.2 per cent in 2018. That’s largely thanks to its pre-existing events business (where underlying revenues are forecast to rise 6 per cent in each one of the next three years), although growth has also accelerated in all three of the group’s other divisions (academic publishing, networking and business intelligence) in the past few years.

Costs associated with the merger are expected to dampen profit growth prospects in the current financial year, but that should reverse once merger synergies begin to come through. Informa is currently in the ‘combination’ phase of its four-point merger plan and is expected to begin operating as a single, combined business by November 2018. Management expects £50m of synergies in 2019, rising to £75m in 2021 and beyond which will help enhance group margins. Reassuringly, JPMorgan recently increased its operating margin forecasts for the historic UBM business from 29 per cent to 35 per cent, meaning ‘new Informa’ adjusted cash profit margins are now expected to hit 31.9 per cent by 2020, compared with the previous 29.9 per cent forecast.  

The combination of margin expansion and revenue growth means adjusted operating profits are expected to grow at a compound annual rate of 15 per cent between 2018 and 2020, compared with a sector average (compiled by JPMorgan) of 10 per cent. Despite better forecast growth, Informa looks cheaper than peers with an enterprise value equivalent to 13 times forecast operating profit versus the sector average of 17 times.

Cash generation is good – free cash flow of £401m compares with £383m of adjusted post-tax profits – which means the group should be able to quickly pay down debt, which in our view looks a better use of funds at the moment than aggressive dividend growth. Net debt is expected to peak at £2.1bn at the end of 2018 before falling to £1.8bn in 2019 and £1.4bn the following year.