Euromoney Institutional Investor's (LON:ERM) H119 results show the positive impact of management’s strategy, particularly in Pricing, Data and Management Intelligence (PDMI), where underlying subscription revenues grew 8%. Challenges remain in Asset Management and we have lowered our group revenue and earnings FY19e and FY20e forecasts by 6% and 5% respectively. The DMGT share distribution has ‘normalised’ the register and ERM now trades as a fully independent FTSE 250 company. With the liquidity constraint lifted, the rating better reflects ERM’s attractive cash flow and high quality earnings.
Swings and roundabouts on revenue, margin
Our revised forecasts reflect the slower-than-hoped top line recovery, due partly to the challenge in driving new business in Asset Management (AM). Investment is being targeted at this aspect of sales and marketing, but takes time to show through in the numbers. Underlying H119 group revenue growth of 1% comprises PDMI +3%, Banking & Finance +4% and AM -3% (FY18: -4%). PDMI operating margins were stable at 36%, benefiting from good subscription revenue growth, countered by challenges in event delegate marketing. FY18’s restructuring showed through In AM, where operating margins ticked up from 38% in H118 to 41%, while Banking & Finance operating margins were down from 20% to 15% with a change in revenue mix and increased headcount. H119’s adjusted net finance cost was just £70k (H118: £2.3m), with underlying adjusted PBT up 13% y-o-y to £46.1m.
Cash-rich balance sheet
Net cash at end March was £29.3m after net acquisition spend of £46.5m (BoardEx and The Deal in, Mining Indaba out) and capex of £3.9m. H119 underlying cash conversion was 98%, slightly diluted by timing of some Fastmarkets business transitioning to data licensing from subscription, in line with management’s push towards B2B Information 3.0 (see our outlook note). Our model suggests an end FY19 net cash figure of £77.1m, giving plenty of firepower for further M&A.
Valuation: Discount reduced
ERM’s shares are up 18% since the start of 2019; +5% since the DMGT placing announcement, significantly narrowing the discount to global financial data peers, currently valued at a current year EV/EBITDA of 16.8x and 15.1x the year after. Parity on the average of FY1 and FY2 EV/EBITDA and P/E would imply a 1,550p share price, 13% ahead of the current level. Given the earnings’ resilience, subscription base and attractive cash conversion, this disparity still appears excessive.
Business description
Euromoney Institutional Investor (ERM) is a global, multi-brand information business that provides critical data, price reporting, insight, analysis and must-attend events to financial services, commodities, telecoms and legal markets.
Our previous forecasts were based on underlying top line growth of around 2% (masked by the impact of the M&A transactions). Given that there have now been two consecutive quarters of 1% underlying progress, there would have needed to be a considerable improvement in trading conditions to make our full year numbers achievable. Whilst there are encouraging signs (the improvement in the rate of decline in AM, the strong subscription performance at Fastmarkets), new business performance still has to pick up and it will take a while for the strengthened teams here to translate their efforts into recordable revenues. We have therefore taken a more prudent approach and trimmed our revenue and earnings estimates.
Our FY21 estimates are tentative and are based on how we would expect the currently configured group to develop. Future acquisitions, though, could change this materially and we would expect that there will continue to be further material transactions.
H119 varying performance by segment
The strategic transition towards outputs that can be embedded in customer workflow is starting to bear fruit. This is particularly clear in the pattern for PDMI (48% group H119 revenues), where the Fastmarkets umbrella brand now accounts for 42% of divisional revenue. Here, the subscription book of business (ie the aggregate sum of all annual subscriptions and therefore a more forward-looking metric than the revenue number) was up by 11.2% at end March. The Fastmarkets Intelligence Platform, designed to deliver much-improved price reporting and analytics functions, should be launched in H219 to support this growth.
The AM (39% of H119 group revenues) book of business remains in decline, but with some divergence among the constituent elements. Institutional Investor, a membership business, is down 1.9% on the prior year, having been positive in Q4 of CY2018, as Brexit concerns have again come to the fore.
Conditions are more testing in investment research, although this has shown some improvement in Q119, led by Ned Davis Research (NDR). MiFID II has had a particular impact on the budgets allocated to research by voting within asset managers and so vote revenues have been in steep decline for both NDR and BCA as they are allocated the same percentage of a much smaller pot. However, subscription rates for both NDR and BCA have remained relatively stable, with renewal rates staying firm (92% for NDR, 84% for BCA as at March 2019). The weakness has been more in driving revenues from new sales contracts, and the sales and marketing effort is now being refocused more on this aspect.
Banking & Finance (13% group) is predominantly an events business and the IMN event in the period was particularly strong. Restructuring to simplify this segment and increase efficiency affected operating margins in the period, with a modest amount of additional overhead being carried forward, which should support growth.
A Capital Markets Day is scheduled for July, which will look at the group strategy and the individual operations in greater detail.
Corporately unfettered
The earlier DMGT transactions loosened the apron strings, following which Euromoney put in place the corporate infrastructure it needed to stand alone.
The more recent DMGT share distribution has delivered:
a normalised share register;
increased liquidity – free float is now 99%;
a fully independent board (the two DMGT-nominated directors have stepped down); and
made the shares eligible at full weighting for tracker funds.
This removes a number of previous barriers to investment and allows potential investors to focus on the group’s strategy and financial attributes.
While the macro environment remains challenging for the AM business, delivering significant top-line growth will be a stretch, but the potential from moving further towards the 3.0 business model – particularly at PDMI – remains good. Acquisitions could accelerate this process. We estimate that the banking facilities in place, plus the cash on the balance sheet, give potential acquisition fire power of around £400m.
