Khanchit Khirisutchalual
Elevator Pitch
I raise my investment rating for RELX PLC’s (NYSE:RELX) [REL:LN] shares from a Hold to a Buy.
I reviewed RELX’s financial performance for the first half of 2021 in my earlier article for the stock written on September 21, 2021.
In this latest update for RELX, my focus is on the mismatch between the stock’s valuations and the company’s outlook, which supports a Buy rating for RELX. The company’s medium-term outlook is good, but this doesn’t seem to have been priced into RELX’s valuations yet. As such, I rate RELX as a Buy.
Positive Financial Outlook
In GBP (British pound) terms, RELX’s revenue is forecasted to grow by +14.3% in the current fiscal year (FY 2022) based on S&P Capital IQ’s consensus financial projections. The company’s top line is also estimated to expand by +8.2% and +6.5% for FY 2023 and FY 2024, respectively. In other words, the market expects RELX to deliver faster revenue growth that it did prior to the pandemic outbreak. As a comparison, RELX’s sales only increased by +1.9% in FY 2018 and +5.1% in FY 2019 prior to the COVID-19 outbreak.
In terms of profitability, the sell-side’s consensus financial forecasts point to RELX achieving normalized net profit margins of 23.4%, 23.7%, and 24.2% for FY 2022, FY 2023, and FY 2024, respectively. In contrast, RELX’s normalized net profit margins were relatively lower in the 21.7%-23.0% range for the FY 2018-FY 2022 period.
In summary, the outlook for RELX is positive, as the company is expected to witness a faster pace of top line growth and generate higher margins in the next few years as per consensus numbers.
I am of the opinion that the market’s consensus expectations for RELX are reasonable. In the subsequent sections of this article, I will touch on the outlook for RELX’s various businesses and its ability to expand margins in the face of inflationary pressures.
Stable Growth For STM And Legal Business Segments
RELX’s Scientific, Technical & Medical (or STM) and Legal business segments performed well for the first half of this year, and the both businesses should continue to deliver decent results in the short-to-intermediate term.
Both the STM and Legal businesses saw their underlying segment revenue grow by a reasonably good +4% YoY in 1H 2022. In the company’s most recent interim results presentation, RELX guided that “revenue growth” for both the Legal and STM segments should “remain above historical trends.”
The company is beginning to reap the fruits of its investments in new production innovation. At its 1H 2022 earnings call, RELX emphasized that “the average growth rate” of the STM and Legal businesses “is likely to come up over time”, as “we continue to launch new functionality, new features, new products, and roll them out.”
In addition, the structural decline for print is having an increasingly smaller impact on RELX’s STM business and the company as a whole. As indicated in its 1H 2022 presentation slides, the print format only accounted for a mere 6% of RELX’s top line. RELX used to derive a higher 9%, 8%, and 7% of its total revenue from the print format in FY 2019, FY 2020, and FY 2021, respectively.
In conclusion, RELX’s Legal and STM businesses should be able to generate decent growth in the foreseeable future, as efforts relating to new production innovation start to pay off and the print format’s revenue contribution continues to fall.
Risk Business Segment Is More Recession Resilient Now
The Risk business is the most important segment for RELX, as this segment contributed the largest share of operating income and the fastest rate of operating profit growth among its various business segments.
RELX’s adjusted operating income for the Risk business segment grew by +7% YoY to GBP1,387 million in the first half of the current year, and the company derived as much as 35% of its operating profit from this business segment in 1H 2022. As such, the future performance of the Risk segment has a major impact on the overall financial results of RELX going forward.
As such, it is encouraging to know that RELX’s sales mix for the Risk business segment has changed over time, which suggests that this business segment is much more resilient in the face of a recession as compared to the past. RELX disclosed at the company’s 1H 2022 earnings briefing that the Risk business is “now out of all those segments almost entirely” which “saw a decline” during the time “the last big US recession happened.” At the recent interim results’ investor call, RELX highlighted that these vulnerable segments that the Risk business had exited in the past years included “those that were driven by advertising, marketing spend or directories or pre-employment screening.”
Therefore, RELX’s business segment is in a much better position than it was in prior recessions due to a change in mix, and this is supportive of the positive revenue growth outlook for the company in the FY 2022-2024 time frame as outlined earlier in this article.
Recovery For Exhibitions Business Should Be Sustained
The company’s Exhibitions business witnessed a significant turnaround in the first half of the year.
Segment revenue for RELX’s Exhibitions business more than tripled YoY from GBP121 million in 1H 2021 to GBP394 million for 1H 2022. Over the same period, the Exhibitions business segment turned around from an operating loss of -GBP48 million for 1H 2021 to generate a positive operating income of +GBP59 million in 1H 2022.
It isn’t a surprise that the company’s Exhibitions segment has turned in a good set of result for the recent interim period. Looking forward, as global economies continue to reopen, RELX’s Exhibitions business should be well-positioned to perform well in the future.
One key risk lies with China from a geographical perspective. As China has adopted a COVID-zero approach, exhibitions activity in Mainland China are likely to recover at a slower pace. On the positive side of things, RELX’s Exhibitions business is geographically diversified, and the Chinese market isn’t a very big revenue contributor for this segment. RELX revealed at its 1H 2022 investor briefing that the Exhibitions business earns “a mid- to high single-digit percentage” of its segment revenue from the Chinese market.
Inflationary Cost Pressures Are Less Of A Concern For RELX
RELX’s overall non-GAAP adjusted operating profit margin expanded by +110 basis points from 30.1% in 1H 2021 to 31.2% for 1H 2022. It is noteworthy that RELX achieved margin expansion in an environment of rising expenses driven by inflationary pressures.
There are two factors that explain why RELX managed to improve its profitability in 1H 2022 and should continue to report higher margins going forward.
Firstly, RELX adopts value-based pricing, and the company’s focus on production innovation (as mentioned earlier in this article) has helped it to deliver greater value to its clients which means price cuts are less probable. In fact, RELX has the ability to raise prices with new products or existing products that boast new value-added features. Secondly, RELX is largely a services company (as opposed to one that makes and sells products), so the increase in commodity prices and supply chain constraints don’t have a meaningful impact on its costs.
Valuations
RELX’s current valuations are reasonably attractive in comparison with its financial outlook.
The market currently values RELX at a consensus forward next twelve months’ normalized P/E multiple of 20.8 times based on valuation data obtained from S&P Capital IQ. This is attractive, considering RELX’s consensus forward ROEs in excess of 50% for the FY 2022-2024 period and its consensus forward EPS CAGR of +11% over the same time frame.
Moreover, RELX’s forward P/E ratio of 20.8 times now is below its three-year average forward P/E of 21.3 times.
Concluding Thoughts
I upgrade RELX’s investment rating from a Hold previously to a Buy now. In my opinion, RELX’s current valuations have yet to price in the positive intermediate-term outlook for the company. This explains why I have a Bullish view of RELX’s shares.
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