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Relx shrugs off debt concerns

Rising net debt could be worrying if interest rates were to rise sharply, but the media giant is confident about the stability of its balance sheet
July 26, 2018

Perhaps we were too optimistic in January when we made the bold claim that media giant Relx (REL) is “as reliable as they come”. A three-month share price collapse followed that article amid fears that US interest rate rises would push up the group’s financial costs and its ability to return money to shareholders.

IC TIP: Buy at 1735p

Half-year results show why investors may have been wary. Net debt (which is partly denominated in US dollars) rose to 2.5 times adjusted cash profits in the first half of the year and total returns (£548m of dividends and £500m of share buybacks) were not covered by free cash flow.

But we don’t think there is cause for concern. Leverage is always cranked up in the first half as this is when the group pays a bigger chunk of its annual dividend – in the second half, total shareholder returns will be covered by cash flow. Chief financial officer Nick Luff also shrugged off interest rate worries – “we’ve got a good mix of currency and about half the interest is paid at a fixed rate”, he explained.

Moreover, the group remains incredibly cash-generative thanks to its low capital expenditure requirements. Tight cost control meant adjusted operating profits grew 6 per cent in the first six months of 2018 – faster than the 4 per cent constant currency increase in revenues. Steady expansion throughout the business means broker Numis continues to expect annual pre-tax profits and EPS of £2.1bn and 83p, respectively (from £2.1bn and 80p in 2017).

RELX (REL)    
ORD PRICE:1,735pMARKET VALUE:£18.1bn
TOUCH:1735-136p12-MONTH HIGH / LOW:1,784p1,399p
DIVIDEND YIELD:2.3%PE RATIO:21
NET ASSET VALUE:205p*NET DEBT:287%
Half-year to 30 JunTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20173.7086233.611.7
20183.6587234.112.4
% change-1+1+1+6
Ex-div:02 Aug   
Payment:24 Aug   
*Includes intangible assets of £10bn, or 954p a share