It feels like there has never been a better time to invest in the U.K. Shares are generally cheap, as Praveen Chawla demonstrated so wonderfully in a recent GuruFocus article.
That is probably why private equity and other investors are snapping up U.K. companies. It has been a record year for takeovers: 1,951 buyouts of British companies, including 889 by overseas investors, have been announced, the highest in the first half of the year since 1980, and deals have closed at an average premium of 33% according to Refinitiv.
One company I am thinking carefully about is RELX PLC (LSE:REL, Financial) (RELX, Financial). The stock is also a high-conviction, large holding in portfolios managed by gurus Nick Train and Alexander Darwall. The company is a global provider of information-based analytics and decision tools for professional and business customers. The Group serves customers in more than 180 countries and has offices in about 40 countries. It employs over 33,000 people, of whom almost half are in North America. Shares are traded on the London, Amsterdam and New York Stock Exchanges.
What I really like about RELX is its high return on equity at 50% and the fact that the business has pivoted away from traditional publishing to offer completely digital products. Like Experian (LSE:EXPN, Financial), it offers exposure to the high-growth data analytics theme. In fact, RELX’s stated top strategic priority is “the organic development of increasingly sophisticated information-based analytics and decision tools that deliver enhanced value to our customers.” What this means is that revenue should become even more predictable (thanks to sticky subscriptions), grow faster thanks to the information revolution and offer better returns thanks to an increasingly asset light model.
The group has four divisions: Scientific, Technical & Medical; Risk and Business Analytics; Legal; and Exhibitions.
Source: RELX
The first three divisions own huge archives of content and data, giving the group a strong moat. The digital nature of the businesses helps it keep costs under control, meaning gross margins have consistently been around the 65% mark. Free cash flow conversion has been around 100% over the last few years, although last year it was understandably down to 81%. Return on capital employed was 15% for 2020, but in the previous seven years has come in around the 20% mark.
Open access in the scientific division
A concern that has been hanging over RELX for a long time has been the question of open access in academic research. Those concerns intensified after the University of California dropped Elsevier (RELX’s publishing division that focuses on scientific, technical and medical publishing) in March 2019. However, the UC and Elsevier signed a new deal in March of this year, essentially putting to bed these concerns.
This division has been very stable and educational spend on content has typically been quite sticky even during recessions. Elsevier is a leading player in academic publishing with about 18% of global market share and more than 25% in scholarly citations. For instance, SSRN, formerly known as the Social Science Research Network, is owned by Elsevier and when I am looking for academic research on finance or economics, I inevitably find myself on SSRN. Another way to show their dominance of this sector is that Elsevier journals have featured articles by 205 of 206 science and economics Nobel Prize winners since 2000 and Elsevier’s free Novel Coronavirus Information Centre saw over 200 million downloads in 2020.
Risk and legal
RELX’s risk division provides customers with information-based analytics and decision tools that combine public and industry-specific content with advanced technology and algorithms to assist them in evaluating and predicting risk and enhancing operational efficiency. This division owns ICIS and Proagrica, important data brands in the energy and agriculture industries respectively, amongst others and shares the valuable LexisNexis legal brand, with RELX’s legal division.
Exhibitions
Clearly, the exhibitions business, formerly called Reed Exhibitions and now rebranded to RX, has struggled over the pandemic period. While some physical events have been held this year, mostly in China and Japan, in a recent trading update the company said, “The evolving Covid-19 pandemic will continue to impact our ability to hold physical events, making the outlook for the year uncertain.” But longer term, the pandemic has given birth to a new product in this segment – digital initiatives, that support RELX’s customers and event brands. This means the exhibitions industry can attract more customers as events can be held in a physical-digital hybrid format, which potentially can increase the overall number of attendees. It may also help reduce costs if the hiring of event locations can be reduced in size. In the short term, as we have seen in the consumer sector with the all the pent-up demand and “revenge buying,” we may see a similar trend in corporate events as corporate executives look to “revenge network” after being stuck for essentially a year and half behind their computer screens.
Source: RELX plc
Dividends
RELX’s dividend cover having been at 2 timesor above since 2013, fell to 1.7 in 2020, yet the company still managed to grow its total dividends last year, a highly impressive feat given the circumstances as many of its peers cut their dividends. This year, dividend cover is expected to get to 1.8 times. Earnings per share is expected to grow 7.1% this year.
In terms of the Piotroski F-score, RELX has achieved either 6 or 7 out of 9 in each of the last five years.
ESG
The company also scores well in environmental, social and governance: RELX held a AAA MSCI ESG rating for a fifth consecutive year; was placed second in its industry sector in Sustainalytics ESG rankings; came fourth in the Responsibility100 Index, a ranking of the FTSE 100 on performance against the UN Sustainable Development Goals; and was one of 41 LEAD companies of the UN Global Compact among approximately 10,000 business signatories.
RELX’s interim results announcement for the six months to June 30 will be released on July 29.
