Hogg Robinson

IMS confirmation of a decent Q1 may preface returns ahead of expectations, given the tendency of Hogg Robinson’s (HRG) operational gearing to surprise, while cash generation (also confirmed by the IMS as “strong”) should allow further dividend growth. Broadly positive company and macro indicators have led to share price outperformance, though still modestly rated, and justify continued investor confidence. We are introducing FY15 forecasts, which highlight the resilience of corporate travel service earnings.

Reassuring IMS
HRG is on course to meet current year expectations. Indeed, a pickup in constant currency revenue in Q1 (+1% against -7% in H213) and guidance of “good progress” over the full year appear amply to support our FY14 forecast of maintained constant currency trading profit. However, these are early days (profit is second-half oriented) and tough times advise caution, while H113 was flattered by one-off benefits of a licensing agreement with a leading GDS provider (not quantified, but we assume to be the bulk of new technology sales that contributed £2m trading profit in the period). Reported “strong” cash generation in Q1 underpins our forecast of a £7m cut in net debt to £80m at March 2014. Further action has been taken, as expected, to tackle the company’s pension deficit.

More of the same in FY15
We expect margin gain to continue to mitigate pressures on revenue thanks to effective cost control, increased online booking, sharing of client cost savings and greater exposure to higher-margin technology and travel-related services. There should be particular benefit from current action (c £6.5m exceptional charge to be incurred this year) to reduce costs (locations, back-office functions etc). The opportunity to expand relationships with existing clients is shown by today’s significant award of the EMEIA travel contract for EY, effective from September. We look for trading margin to rise from 14.4% to 14.6% on 2% higher constant currency revenue, which may be pessimistic given HRG’s record of margin delivery.

Valuation: Appealing
Despite recent outperformance (c 30% against FTSE All-Share over the past three months), HRG’s FY14e P/E rating remains low (9x) compared with that of the All-Share Support services sector (c 16x). The company is well financed, cash generative and has a generous dividend policy (the yield has strong cover of 3.6x).

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