BUY: Experian (EXPN)
Organic revenue from the data services group’s consumer services business jumped by 17 per cent, writes Nilushi Karunaratne.
Experian saw its organic revenue rise by 4 per cent in the year to March 31, as 17 per cent growth in consumer services offset a flat performance from its business-to-business (B2B) operations.
Momentum was led by North America, with the B2B segment benefiting from low interest rates and higher mortgage refinancing activity, while the consumer services business gained 9m new members. Together with a strong performance in Latin America, this offset weakness in the UK and Ireland and EMEA/Asia Pacific region, keeping adjusted operating profit flat at $1.39bn (£977m).
Looking ahead, Experian is guiding to 7 to 9 per cent organic revenue growth for the current financial year, with 15 to 20 per cent growth in the first quarter.
“Their expectation of double-digit revenue growth and rising profit margins in the current year should be well received by investors,” says Steve Clayton, manager of the HL Select UK Growth Shares Fund, where Experian is a top holding. “Experian’s record of growth through adversity, with a notable acceleration as economies emerge from the pandemic sets it apart.”
That resilience does come at a price, however, with the shares currently trading at 31 times consensus 2022 earnings. But given the group’s high margins and the long-term structural demand for its data and analytical tools, that valuation isn’t unreasonable.
SELL: Easyjet (EZJ)
Vaccination rates offer some hope, but negligible growth is expected in international air traffic forecast for this year, writes Mark Robinson.
The latest analysis from the IATA points to a post-tax industry loss of $47.7bn (£33.8bn) in 2021, admittedly an improvement of sorts on the $126bn aggregate loss for last year when global passenger numbers fell by 60 per cent.
But beyond the losses, the real problem for the carriers has been the scale of the cash outflows, with the cash-burn for this year estimated at $81bn. Most large airlines have raised enough capital to cover their medium-term cash commitments, but many of the smaller carriers had weak balance sheets and poor liquidity prior to the pandemic, so further government intervention and/or industry consolidation is likely. State aid provisions have already gone out the window as several European airlines, most notably Alitalia, AirFrance/KLM and Lufthansa, were kept afloat by various national governments within the EU.
Much depends on how rapidly and the extent to which utilisation rates improve, with the clinical situation on the ground – and resultant regulations – the chief determinant. The IATA analysis estimates that the global passenger load factor (as a proportion of available seat miles) will come in at 67 per cent for 2021, roughly in line with the prior year, but substantially down on 2019 despite widespread route cancellations.
With negligible growth in international air traffic forecast for this year, airlines with a higher proportion of domestic routes are set to outperform the wider industry. That’s good news for carriers stateside, but the European short-haul market has been badly hit.
You get a fair reflection of this through Ryanair’s March year-end figures which detailed an 81 per cent fall in revenue to €1.64bn (£1.41bn). The budget carrier revealed that traffic numbers fell to 27.5m from 149m (pre Covid-19), along with a 24-percentage point decline in the load factor. All of this was largely predictable, yet management felt unable to provide any meaningful guidance for FY22 given the variables at play.
The group is hoping to take delivery of the first of its Boeing 737-8200 fleet by the end of the month, an aircraft that management believe will “further widen the cost gap between Ryanair and all other European airlines for the next decade”. The group has always employed narrow-body aircraft to serve its short-haul routes, but the Boeing model offers further benefits in terms of fuel consumption and reduced greenhouse gas emissions. That last environmental point is salient given that some long-haul airlines were already looking to delay widebody deliveries, or cancel existing orders, even prior to the pandemic.
The last thing airlines need is yet more planes sitting idly with international travel still on life-support. The Financial Times estimates that mothballing an aircraft can cost as much as $30,000 depending on the specific maintenance requirements.
On current rates of take-up, it is thought that around three-quarters of the population in North America and Europe will have been vaccinated by the third quarter. But though there is undoubtedly pent-up demand, with thousands of holidaymakers already booked for travel to “green list” countries, the fear is that the industry won’t see the full benefits of the key summer holiday period, adding further pressure on industry balance sheets. We’re nearly into June and the official government line is that you should avoid travelling to traditional summer holiday hotspots, such as Spain, France, Italy and Greece, unless you have a compelling reason to do so.
However, Portugal, another popular destination, made it on to the government’s list of countries without travel quarantine restrictions. That’s certainly good news for easyJet given the number of flights it normally runs to the country. Management said the airline is capable of ramping-up operational capacity to 90 per cent of its current fleet in a short space of time. Indeed, the carrier added 105,000 seats subsequent to the announcement of the green light destinations.
Like its rival Ryanair, details of easyJet’s March interim figures make for grim reading: a headline loss of £701m; a 26.6 percentage point reduction in the load factor; and an 89 per cent fall in passenger numbers. All predictable in a sense, but any further easing of restrictions is unlikely to trigger a sudden return to pre-pandemic volumes, so the airlines will probably have to endure another lean season, with “liquidity” remaining the watchword for the industry. Prospects remain intertwined with the clinical situation on the ground. And until we have clarity on that front, the sector is best avoided.
HOLD: Hyve (HYVE)
Events company Hyve managed to post a profit in the first half, despite various lockdown measures, writes Lauren Almeida.
The easing of lockdown gives new hope for a recovery for businesses such as Hyve. The group managed to post an adjusted operating profit of £31.3m at its half-year mark, despite the industry-wide impact of pandemic lockdowns.
Hyve is encouraged by the “pace of vaccine rollouts in countries such as the United Kingdom and United States”. Indeed, the group is already looking ahead to the gradual return of international travel in its statement, which it thinks will help to stimulate participation in its events.
It has already hosted events in Russia, China, India and Turkey in the first half, with hopes for more activity in western economies in the second. Combine that with £62.9m in insurance proceeds from cancellation and postponement claims so far this year, and Hyve should be able to recover some of its top line by the end of the period.
Much of the company’s half-year result focused on the return of in-person events — but Hyve is also positioning itself for potential growth in virtual set-ups, too. It has hosted more than 80 online events, and acquired digital peer Retail Meetup for £18.5m towards the end of last year as part of its “omnichannel strategy”. The division that it now sits under, global communities, posted revenues of £2.1m in the first half, around 10 per cent ahead of expectations.
This could explain why analysts at Peel Hunt have been infected with the “cautious optimism” bug, too, upgrading the company from a “hold” to an “add” rating. Their forecasts suggest that adjusted pre-tax profits will rise to a modest £4.1m in the 2021 full year, then up to £19.8m in 2022. Hyve says that it is currently trading somewhere between its “recovery” and split-speed east/west model scenarios, although its presence in India might skew that picture going forward.
The group looks slimmer now that it has disposed of its business in Kazakhstan, and well supported by its insurance claims, on top of the £126.6m it raised this time last year. Debt covenants were renegotiated then too, so that its leverage and interest cover ratios were replaced with a £30m-£40m liquidity covenant that lasts until the end of March 2022. For now, the balance sheet seems stable enough, and Hyve does look like it deserves the cautious optimist approach.
Chris Dillow: The true inflation risk
How seriously should we take the Bank of England’s 2 per cent inflation target? If we do, then we should stop worrying about inflation and worry about higher interest rates instead, because the Bank will raise rates to ensure that inflation stays at about 2 per cent.
Markets, however, are not doing this. The five-year break-even inflation rate, as I write, is at 3.5 percentage points, close to its highest since 2000, despite the market expecting three-month rates to rise by almost a percentage point by mid-2025. Granted, this is based on RPI inflation, but even allowing for the fact that this usually exceeds CPI inflation, this is above the Bank’s inflation target.
There is a good reason for this. In the next few months inflation will rise because last year’s drop in oil prices and cut in VAT on the hospitality trade will fall out of the data to be replaced by increases. The Bank cannot prevent this simply because it takes time for interest rates to reduce inflation. Instead, it says it will not raise rates until “there is clear evidence” of the inflation target being met “sustainably”. This suggests it will tolerate a few months of above 2 per cent inflation. This is wholly consistent with the Bank doing its job. Its remit allows “inflation to deviate from the target temporarily” because of “shocks and disturbances”.
This, though, is not the only reason why break-even inflation is above 2 per cent. Another reason is that there is a risk that the chancellor could raise the inflation target: remember, it is he and not the Bank that decides this. Such a move has several advocates, such as James Smith at the Resolution Foundation, Joe Gagnon and Christopher Collins at the Peterson Institute for International Economics and Laurence Ball at Johns Hopkins University.
One case for doing so is that post-Covid changes to the patterns of supply and demand might require big changes in some relative prices. And to the extent that some firms are reluctant to cut prices, such changes are easier to achieve when inflation is higher. Cynics might add that raising the inflation target would be a way of preventing interest rates rising, thereby protecting house prices.
Personally, I’m surprised how little debate there has been about the level of the inflation target. But this could change and markets are reasonable to price in a risk of it doing so.
There’s another risk. It could be that inflationary forces will prove so great that the Bank could only keep inflation to 2 per cent by clobbering the economy. Its economists estimate that a 1 percentage point increase in Bank rate eventually reduces inflation by around a percentage point, but at the cost of cutting output by up to 0.6 per cent. If we see inflation combined with sluggish trend growth, the Bank might choose to err on the side of tolerating inflation. Such a scenario would, however, be a sign of a dysfunctional economy: if weak growth generates significant inflation, something is very wrong.
There are, therefore, inflation risks and it’s reasonable to price them in. But these risks don’t come from monetary growth or wages or commodity prices, but rather from policy or from structural failings in the economy.
Chris Dillow is an economics commentator for Investors’ Chronicle