Join our community of smart investors

High-quality Relx is as reliable as they come

OLD RELIABLE TIP OF THE YEAR: Consistently impressive underlying and acquisitive revenue growth makes this media and technology company a top pick in 2018
January 4, 2018

Often the UK market is considered to offer thin pickings for tech enthusiasts, but this observation often overlooks a tech giant hiding in plain sight. The biggest technology company to grace these shores is the risk and business analytics division of media maestro Relx (REL). What’s more, this business provides an important foundation for the Anglo-Dutch media giant’s record of consistent, high-quality growth.

IC TIP: Buy at 1731p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points

Consistent underlying revenue and profit growth

Excellent cash generation and strong balance sheet

Sensible acquisition strategy

Share buyback scheme

Bear points

Pension deficit

Falling demand for print products

Relx has an enviable record of producing low-to-mid-single-digit sales growth, and the effect of this top-line progress on earnings has been amplified by gradual margin improvement and persistent share buybacks. Low capital expenditure requirements mean that, as well as buybacks, annual dividend growth has averaged 10 per cent over the past five years and the business has been able to pursue a rolling programme of bolt-on acquisitions, while all the time keeping key debt ratios stable. 

The risk and business analytics division contributes roughly 28 per cent of Relx’s revenue and 32 per cent of adjusted operating profit. The company owns an enormous backlog of data on everything from insurance and healthcare to crime and transport, which means barriers to entry are high. The company’s products include advanced analytics software, which is being used by an increasing number of corporations, public bodies and government agencies, particularly in the US. In the first nine months of the year to December 2017, the business reported underlying revenue growth of 8 per cent and management expects this trend to continue. In the US, this growth has been driven by the expansion of datasets and improved analytics. The next big opportunity is exploiting the enormous prospects for the group’s products and data backlog in the UK, Europe and beyond.

The risk and business analytics division is quickly catching up with the group’s current largest division, scientific, technical and medical (ST&M), which generates 34 per cent of revenue and 40 per cent of profit. That division has had to contend with a decline in demand for print publications, but management has successfully realigned the business and today just 17 per cent of its revenue comes from print. The addition of electronic reference tools has helped attract new customers and promote additional relevant titles to doctors and scientists. Plus, the move to digital helped nudge up operating margins, which stood at over 35 per cent in the first six months of the year. 

Like ST&M, sales from the group’s legal business (23 per cent of revenue and 15 per cent of adjusted operating profit) are very predictable and only 16 per cent now come from print. Both divisions make their money largely from long-standing subscriptions: a law firm is highly unlikely to cancel its subscription to Lexis Nexis, and the same is true of a university that requires access to The Lancet scientific journal. Growth here and in the exhibitions division (15 per cent of revenue and 13 per cent of adjusted operating profit) mostly comes from the chopping and changing of the portfolio to suit the market demand. In the nine months to September 2017, Relx acquired six assets for £118m and disposed of £78m-worth of events and titles.

Aside from the rising underlying revenue growth, well-diversified portfolio and sensible acquisition strategy, there is a great deal to commend Relx to investors. Capital expenditure has averaged just 5 per cent of group sales since 2012, and the vast majority of that has gone into technological development. Despite increased staff costs as the group expands it digital capabilities, operating margins have remained stable at 30 per cent. Tight capital control ensures excellent cash generation, and in the first half of the 2017 financial year adjusted cash flows rose 16 per cent to £1.04bn, or 90 per cent of adjusted operating profit. The balance sheet is in good shape, too; with historic pension deficit and lease liabilities included, the net debt to adjusted cash profit ratio stood at 2.4 times at the half-year stage. By the end of the 2018 financial year, net debt is expected to fall to just 1.5 times adjusted cash profit.

All this stability allows the group to pay gradually increasing dividends while buying back shares. In 2017, management spent £700m on its own shares and has announced ir will buy back another £100m-worth between January and February 2018.

RELX (RELX)     
ORD PRICE:1,731pMARKET VALUE:£35.7bn
TOUCH:1731-1732p12-MONTH HIGH:1,784p1,381p
FORWARD DIVIDEND YIELD:2.3%FORWARD PE RATIO:20
NET ASSET VALUE:93p*NET DEBT:£5.0bn
Year to 31 DecTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
20145.771.5856.326.0
20155.971.6760.529.7
20166.901.9371.633.9
2017**7.442.1580.036.6
2018**7.802.3286.439.5
% change+5+8+8+8
Normal market size:1,500   
Matched bargain trading    
Beta:0.93   
*Includes intangible assets of £9.4bn, 465p a share
**Numis forecasts, adjusted PBT and EPS figures