Early stages of new strategy

Euromoney Institutional Investor 24 May 2016 Update

Euromoney Institutional Investor

Early stages of new strategy

Half year results

Media

24 May 2016

Price

982.5p

Market cap

£1,260m

£/$1.45

Net cash (£m) at end March 2016

56

Shares in issue

128.3m

Free float

32.3%

Code

ERM

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

8.0

10.4

(16.5)

Rel (local)

10.3

6.8

(5.8)

52-week high/low

1,230p

855p

Business description

Euromoney Institutional Investor is an international business-to-business information and events group. Its portfolio of over 50 specialist businesses spans macroeconomic data, investment research, news and market analysis, industry forums and institutes, financial training and excellence awards.

Next events

Final results

24 November 2016

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Bridie Barrett

+44 (0)20 3077 5700

Euromoney Institutional Investor is a research client of Edison Investment Research Limited

H116 results reflect Euromoney’s (ERM) legacy structural issues and difficult trading environment, partially offset by currency benefit. The statement also contains pointers as to how and when internal actions will shift the momentum. The group continues to generate plentiful cash, smoothing the process of realigning the portfolio and optimising the positioning of its strongly branded B2B digital information offer. Clear sight on driving the top line should enable ERM to regain its traditional sector premium.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/14

406.6

116.2

70.6

23.0

13.9

2.3

09/15

403.4

107.8

70.1

23.4

14.0

2.4

09/16e

390.0

101.0

64.5

23.4

15.2

2.4

09/17e

397.5

106.5

68.0

23.4

14.4

2.4

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Looking for signs of the turn

Underlying revenues (adjusted for currency, M&A, timing/biennials) were down by 6% in H116 year-on-year, continuing the pattern from FY15 and in line with market (and management) expectations. Advertising remains weak. The drag from businesses identified in the new CEO’s strategic review as ‘bottom left quadrant’ is clear in the figures. Subscription revenues dipped to zero year-on-year growth in Q216 – again as previously indicated, but the signs are that the overall snapshot book of business is now trending back up and we would expect the current subscription growth point to be the nadir. Management’s view is that 85% of the ‘bottom left’ business has been, or is being addressed, on a faster schedule than envisaged, with obvious positive implications for the overall group operating margin recovery. Our full year FY16 and FY17 forecasts are unchanged.

Activity in portfolio management stepping up

M&A is set to become an increasing feature with more active management of the portfolio. The disposals of Gulf Publishing and Petroleum Economist (for $18m) fell after the period end and are unlikely to be the only disposals, although not all ‘bottom left’ is on the slate. The intention is to disinvest, not necessarily to divest. There is plenty of firepower for acquisition. Net cash was £56m at end March; £76m at end April with the disposal proceeds banked. The $160m loan facility from DMGT has been rolled over until November 2018. Price discovery and adjacent financial markets such as risk and compliance, telecoms, fintech and insurance were all identified as areas of interest in the review (see Outlook in March 2016).

Valuation: Waiting the turn

ERM traditionally trades at a premium to other quoted B2B media companies, reflecting its quality and consistency of earnings (itself a reflection of its well-known brands), strong balance sheet and cash conversion. The weakness of customers’ markets has undermined these advantages and the valuation currently sits at a discount of 9% on calendar 2016e P/E and a 4% premium on EV/EBITDA.

Underlying markets remain weak

Our forecasts are broadly unchanged on these results and are based on the assumption that there is no sign of immediate recovery in underlying customers’ markets. The trading backdrop for investment banking markets remains very difficult, with the Q1 reporting season reaffirming the mood and with cost-cutting still the order of the day, but this has been built into ERM’s expectations. Asset management at one point earlier last year looked to be the brighter spot, but belts have also been tightened, with the full impact not yet necessarily completely worked through. Commodity and energy markets are very obviously still in the doldrums with, perhaps, some signs of patchy life re-emerging.

Our adjustments to forecasts are solely to reflect the corporate transactions and further write-down of goodwill on Mining Indaba (where all the goodwill on acquisition has now been written off). Our forecast year-end cash position has been revised down slightly, but cash conversion remains very strong.

Self-help programme

The impact of the drag on profit from the “disinvest quadrant” is the largest element in the difference in the adjusted operating and pre-tax profits between the two periods (H116 over H115). In terms of operating margin, the effect is shown below. In PBT terms, it accounted for a fall of £4.9m, which was partially offset by a positive FX impact of £3.2m primarily reflecting the relative strength of the US dollar (which should continue to be of benefit in H216).

Exhibit 1: Operating margin bridge H116 vs H115

Source: ERM. Note: Adjusted underlying operating margin.

Given the background, expectations of top-line growth are inevitably limited on existing business. Concentrating on the subscription business should deliver an improvement in the quality of earnings, particularly when compared with the advertising income stream. There has been a determined focus on what was described in the strategic review as the “operational deficit”. Driving product development, sales and marketing already appears to be having a positive impact on stabilising and turning the corner on the book of business.

Substantive progress at the top line, though, is going to be predicated for now on acquisitions and extension of the key brands. Dealing with the drag on operating margin from ‘bottom left’ is the main potential driver, although there are always gains to be made through concentrating on control of overhead across the business.

Exhibit 2: Financial summary

£m

2014

2015

2016e

2017e

30-September

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

406.6

403.4

390.0

397.5

Cost of Sales

0.0

0.0

0.0

0.0

Gross Profit

406.6

403.4

390.0

397.5

EBITDA

 

 

122.7

109.4

102.8

108.3

Adjusted Operating Profit (before amort. and except.)

119.8

106.7

98.8

104.0

Intangible Amortisation

(16.7)

(17.0)

(17.8)

(17.8)

Exceptionals

2.6

33.4

(12.9)

0.0

Capital Appreciation Plan

(2.4)

2.5

0.0

0.0

Operating Profit before ass's & fin. except'ls

103.3

123.1

68.0

86.2

Associates

0.3

2.4

2.4

2.4

Net Interest

(1.6)

(1.3)

(0.1)

0.1

Exceptional financials

(0.6)

(0.9)

0.0

0.0

Profit Before Tax (norm)

 

 

116.2

107.8

101.0

106.5

Profit Before Tax (FRS 3)

 

 

101.5

123.3

70.3

88.7

Tax

(25.6)

(17.6)

(19.2)

(20.2)

Profit After Tax (norm)

90.8

88.9

81.8

86.3

Profit After Tax (FRS 3)

75.9

108.2

51.1

68.5

Average Number of Shares Outstanding (m)

126.5

126.4

126.4

126.4

EPS - normalised fully diluted (p)

 

 

70.6

70.1

64.5

68.0

EPS - (IFRS) (p)

 

 

59.1

83.4

40.2

54.0

Dividend per share (p)

23.0

23.4

23.4

23.4

Gross Margin (%)

100.0

100.0

100.0

100.0

EBITDA Margin (%)

30.2

27.1

26.4

27.2

Operating Margin (before GW and except.) (%)

29.5

26.5

25.3

26.2

BALANCE SHEET

Fixed Assets

 

 

564.2

579.1

546.5

513.9

Intangible Assets

545.4

531.4

499.3

467.3

Tangible Assets

18.6

9.5

8.9

8.3

Investments

0.1

38.3

38.3

38.3

Current Assets

 

 

86.0

110.1

158.1

213.5

Stocks

0.0

0.0

0.0

0.0

Debtors

68.4

83.7

78.0

79.5

Cash

8.6

18.7

72.3

126.2

Other

9.1

7.7

7.7

7.7

Current Liabilities

 

 

(208.9)

(208.3)

(209.2)

(216.4)

Creditors

(208.4)

(207.3)

(208.7)

(215.9)

Short term borrowings

(0.5)

(1.0)

(0.5)

(0.5)

Long Term Liabilities

 

 

(84.7)

(33.2)

(45.2)

(43.4)

Long term borrowings

(45.7)

0.0

0.0

0.0

Other long term liabilities

(39.1)

(33.2)

(45.2)

(43.4)

Net Assets

 

 

356.5

447.7

450.2

467.6

CASH FLOW

Operating Cash Flow

 

 

110.2

109.5

90.0

104.2

Net Interest

(1.1)

(1.1)

0.1

0.3

Tax

(22.5)

(13.7)

(16.9)

(17.8)

Capex

(6.3)

9.4

(3.5)

(3.7)

Acquisitions/disposals

(58.9)

(15.6)

13.5

0.0

Equity Financing / Other

(21.5)

(4.4)

0.0

0.0

Dividends

(29.0)

(29.4)

(29.1)

(29.1)

Net Cash Flow

(29.3)

54.6

54.1

53.9

Opening net debt/(cash)

 

 

10.9

37.6

(17.7)

(71.8)

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

2.6

0.7

0.0

(0.0)

Closing net debt/(cash)

 

 

37.6

(17.7)

(71.8)

(125.7)

Source: Company accounts, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

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Level 25, Aurora Place

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NSW 2000, Australia

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