On message
FY14 saw Hogg Robinson Group Plc (LONDON:HRG) deliver in terms of trading and progress towards key objectives, notably a reduced cost base and net debt (down 25% in the period) and growth in managed travel. As HRG adjusts well to a changing corporate travel market, we expect further core profit gain in the current year, albeit masked by higher investment costs at Spendvision, hence our maintained forecast of flat PBT. HRG’s rating is well below that of the market and the sector; the yield has strong cover.
Satisfactory H2
An 8% rise in trading profit by corporate travel management in H2 was well ahead of our expectations (+2%) as the period ended on a particularly strong note (constant currency revenue +2% for the half against flat for the first four months). Consequently, the division’s trading margin (16.0% vs 14.6% in H213) also surprised, boosted by cost control and the continued move by clients to online self-booking. By contrast, as envisaged, investment costs curbed profit at Spendvision, more than eliminating its £1.1m improvement in H1. The sharp fall in year-end net debt to £65m reflected tight working capital management while the rise in pension deficit was driven again by a lower discount rate (little increase in costs in FY14).
More of the same
In the current year we expect further margin gain in corporate travel management (14.7% vs 14.4% in FY14) owing to an anticipated 2% pickup in revenue, cost control (guidance of £4m savings from reorganisation), new technology sales and online self-booking. The new business pipeline is very healthy, as is the opportunity to expand relationships with existing clients. Key growth initiatives, such as new service offerings (eg meetings, groups and events business) and new markets (eg marine, offshore and energy sectors) are already paying off. Encouragingly, our flat PBT forecast relates only to a step-up in sales and marketing investment in potentially high-growth Spendvision (estimated £1.7m lower profit than in FY14).
Valuation: Attractive
HRG’s prospective FY15 P/E rating is low (under 10x) compared with that of the FTAS UK Support Services sector (16.5x). We feel that such a discount is undeserved, even allowing for investor caution about corporate travel service earnings, the company’s large pension deficit and the concentration of top shareholdings. HRG is securely funded (newly refinanced to 2018 and FY15e net debt/EBITDA of just 1.0x), cash generative and committed to a generous dividend policy (FY15e cover of 3.3x).
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