Relx's database is a treasure trove

Relx (REL) outshines most of the media sector in the UK, but the publisher comes from humble beginnings. One of the group’s earliest businesses can be traced back to a modest printing mill in Kent in 1895. But in the intervening one-and-a-quarter centuries, Relx has adapted to changes in its end markets and grown into one of the most pre-eminent names in academia, the wider world of publishing and, more recently, data analytics. Key to recent changes has been its move from print to digital and the application of technology to unlock huge value in the data it possesses.

From print to pixel

At its peak, the group published more than 300 printed trade titles, including the New Scientist. But last year the group ditched its final print magazine, marking its transition to a digital business. 

Relx has four divisions. The first is scientific, technical and medical (STM), which includes its key academic publishing business, Elsevier, with a portfolio of more than 2,200 journals. The second is its risk and business analytics (RBA) division, which analyses and processes vast quantities of data. The third division, legal, provides legal, regulatory and business information and analytics. These three businesses make up the foundation of Relx’s huge archive of content and data, which give the group its strongest competitive ‘moat’ – it would be incredibility difficult and expensive to create such a colossal bank of resources from scratch. 

The fourth and final division is exhibitions, a global face-to-face events business that has unsurprisingly not had a good year – more on that later.

The largely digital nature of Relx’s three other operations has helped control costs, while a reliable and growing subscription base – which accounts for just over half of total sales – has supported consistent revenue. This is reflected in the five-year average gross margin of 60 per cent and a solid record of cash generation: free cash flow conversion has sat comfortably over 100 per cent during the same period. 

One way the company has used this cash is for regular bolt-on acquisitions, which have been used to grow its target datasets and analytical expertise even further. Indeed, Relx has spent more than £700m on businesses this year alone.

The company has also returned prodigious amounts of capital via share buybacks and dividends. Dividends in cash terms reached £842m in 2019, with the half-year dividend this year holding steady at 13.6p a share, despite the disruption caused by coronavirus. And cash returns based on buybacks have ranged between £500m and £700m annually since 2015, sitting at £600m in 2019. 

The company also has a record of creating value through reinvesting cash back into the business – capital expenditure has sat at around 5 per cent of sales for the past five years, coming in at £380m in 2019. This investment has supported underlying profit growth that has varied between 3 and 5 per cent in the same period, while operating margins have ticked up from 24.6 per cent to 27.2 per cent. And, importantly, the group’s 25 per cent return on capital employed (ROCE) – the profit generated on each pound invested in operations – in 2019 suggests this use of cash is working in shareholders’ interests.

Despite this spending, management has not let the company’s borrowings run away, with net debt (excluding lease liabilities) to adjusted cash profits usually sitting at a multiple of between 2 and 2.5 – although the impact of coronavirus has caused it to tick up to 2.8, as of the end of June.

The open access conundrum

Relx’s business model ticks several boxes: reliable revenues, chunky margins and sensible management. But there are some wider challenges that are outside of its direct control. The first is the open access debate: in March last year, the group’s shares dropped 7 per cent after the University of California (UC) terminated its contract with Elsevier. The American college claimed that the publisher was “unwilling to meet UC’s key goal: securing universal open access to UC research while containing the rapid escalation of costs associated with for-profit journals”. The contract’s $11m (£8m) value was a drop in the ocean compared with Relx’s £7.5bn in sales in 2018, but the market’s reaction certainly reflected concerns that the broader open-access issue could escalate. 

That was almost two years ago – and now Elsevier’s institutional clients, mainly universities, have found themselves strapped for cash this year, with fewer people on campus, and fewer valuable international students. As they look for more ways to save money, Relx’s pricing structures could fall in the line of fire, not least because the STM division reports gargantuan operating margins of 37 per cent.

But these concerns are perhaps overdone: the fact that Relx guards access to these critical materials would suggest that the company has the upper hand. Indeed, Elsevier plays an important role in the world of academic publishing: the publisher’s article output accounts for 18 per cent of global research, as well as more than a quarter of scholarly citations. With this in mind, its cost per article does not seem unreasonable compared with its peers, and the research it publishes tends to get more attention than that from rival journals. 

Admittedly, gatekeeping information at a significant profit is not a good look, and it is not hard to imagine regulators getting involved, which could turn the tide against Relx. The STM division accounted for 40 per cent of the group’s total operating profit in 2019. That being said, academic subscriptions only make up about two-fifths of STM revenue. 

Event-less

We think the biggest caveat to Relx’s bull case its events business, Reed Exhibitions. The segment made up a relatively small, but still significant, 16 per cent of the group’s top line in 2019, and 13 per cent of its adjusted operating profit. The first wave of lockdowns in the spring battered the business, with sales crashing three-fifths in the first half alone, forcing the group to pull its guidance for the 2020 full year in April. 

While that has since been reinstated, no doubt the second lockdown in England – which for now will be shorter than the one in March if the government sticks to its current timeline – could have an equally horrific effect on its trading. But a widescale vaccine roll-out may be possible for spring next year. If and when restrictions on movement lift, it could be that pent-up demand will be unleashed for face-to-face events. While Relx’s events business is cyclical, a recovery may not be too far off – indeed, the shares bounced by a tenth on the day that drugmaker Pfizer (US:PFE) announced that its vaccine candidate was 90 per cent effective. 

But for Relx, its enormous bank of information, its digital transformation and growing proportion of subscription revenues are central to what we believe make it a sturdy pick in the long run. There are few holes in this core part of the group’s business model – although investors should note that the company does take on some currency risk. Relx reports in sterling, despite the fact that most of its sales are in US dollars: this means that any movement in the dollar against sterling or the euro could affect its accounts. Still, with prospects beginning to look up for its events business and the rest of the company’s huge archive of data and content providing highly durable armour, we remain keen on the shares, which were one of our Tips of the Year for 2020 in January before Covid-19 struck. There is a decent yield on offer and a price to forecast 2021 earnings multiple of 20 also looks attractive.