Well-adjusted
Hogg Robinson Group Plc (HRG.LONDON) is responding well to a changing corporate travel market. Its enhanced technology offering strengthens a proven model and its ability to serve the wider travel industry and expense sectors, while good progress has been made in ensuring a suitable cost base. Meanwhile, despite testing conditions, the recent IMS suggests an improving business trend. HRG’s rating is well below that of the market and the sector, even after clear share price outperformance over the past year. The slight reduction in our FY15 forecast reflects higher investment at Spendvision.
Bright profit outlook
The prospect of an improvement in like-for-like trading profit in FY14 is highly creditable, given continued market weakness during the period, and is testimony to the resilience of HRG’s model. In the year just started, we expect more of the same, with margin gain driven by cost control, technology sales, online self-booking, as well as by market recovery. The new business pipeline remains very healthy, as does the opportunity to expand relationships with existing clients. Encouragingly, the £0.7m cut in our PBT forecast relates only to a step-up in sales and marketing investment in its potentially high-growth Spendvision operation.
Enhancing the model
HRG’s tried and tested model is getting even better. Growing demand for technology is playing to its strengths not only in terms of enhanced higher-margin delivery to travel management clients but in its ability to serve the wider travel industry and expense sectors. The company’s revenue is predominantly managed travel income, whereby fees are received specifically to manage down client costs as well as from a range of added value, higher-margin related services, whose increasing complexity builds a robustness of earnings and differentiation from leading competitors. The client base is diverse.
Valuation: Long-term appeal
HRG’s prospective FY15 P/E rating is low (almost 10x) compared with that of the FTAS UK Support Services sector (16.5x). Such a discount is undeserved, even allowing for investor caution about corporate travel service earnings (repeatedly shown to be overdone), the company’s large pension deficit and the concentration of top shareholdings. HRG is securely financed, cash generative and committed to a generous dividend policy (the current yield has strong cover).
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