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Experian - Deserving of credit

Nicholas Hyett | 14 July 2016 | A A A
Experian - Deserving of credit

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Experian Plc Ordinary USD0.10

Sell: 3,314.00 | Buy: 3,316.00 | Change -71.00 (-2.09%)
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Experian's first quarter trading update, announced this morning, shows continued mid-single digit growth, with organic revenues up 5% at constant exchange rates, up 1% at actual exchange rates. The shares are opened broadly flat.

At a divisional level the Group saw strong organic revenue growth in the Credit Services division, up 8%, with Decision Analytics delivering 6% growth. The remaining division delivered a weaker overall performance with Marketing Services growing 2% and Consumer Services, which only operates in North America and UK & Ireland, flat.

Full year guidance remains unchanged, with group expecting organic revenue growth in the mid single-digit range at constant currency, and to deliver stable margins.

As a dollar reporter the group has seen significant currency fluctuations in the quarter, notably Sterling weakness and strength in the Brazilian Real. If current exchange rates prevail through to the end of the year this would result in a headwind to EBIT of approximately 1%, weighted to the first half.

The Group has seen no significant adverse impacts from the EU vote so far.

North America - +5% Organic Revenue Growth

Credit Services saw robust 11% growth, supported by demand for credit marketing and loan origination services. Health continues to see growth, with new client wins benefitting from the One Experian initiative - pooling the group's data, analytics and software.

The previously troubled Consumer Services division grew revenues at 1%. The free sites launched a year ago have accumulated 4.5m members and are attracting significant volume to the Experian.com Premium membership service.

Decision Analytics and Marketing Services saw revenue declines of 1% and 2% respectively.

Latin America - +8% Organic Revenue Growth

Trends in Credit Services, up 6%, remain unchanged, reflecting deepening client relationships. The build out of the relatively young Decision Analytics and Marketing Services businesses in the region continued, with the company also launching its first free credit report for Brazilian consumers within the last week.

UK & Ireland - +1% organic growth

Credit Services saw 6% growth with Marketing Services growing 2%, helped by growth in digital marketing. A 2% decline in Decision Analytics revenues is attributed to a very strong comparative from the rollout of a new verification service in the UK public sector last year.

In line with trends previously seen in the US, the UK Consumer Service division saw organic revenue soften, down 1%, with the group responding by moving towards a more diverse multi-service model.

EMEA/Asia Pacific - +9% organic growth

The group sees a growing pipeline of opportunities in the region going forwards. Decision Analytics is expected to benefit from strong take-up of credit decision and fraud prevention services, while demand for cross-channel marketing and data quality services will boost Marketing Services.

Our view:

Experian isn't the most exciting company in the world, but in these uncertain economic times, when many companies are struggling to deliver any meaningful growth at all, this is probably no bad thing.

The company has proved able to deliver consistent mid-single digit top line growth, even in challenging economic environments such as Brazil, while returning prodigious amounts of cash to shareholders.

If we had one grumble, it would be that margins aren't growing. Experian's business model is very capital light and should be highly scalable. However, rising regulatory costs and investment in 'growth initiatives' has seen margin progress stall. On the plus side, at least Experian has the scale to shoulder this regulatory burden, while investing to maintain its competitive position.

The North American consumer services division has been under attack from alternate providers, offering free credit scores. Experian responded by stepping up marketing and investment in its premium website, Experian.com; which provides tools to help customers understand their credit score, rather than just showing them a number. Progress has been encouraging, if slow, with the division returning to organic growth - although the emergence of similar trends in the UK & Ireland in recent months is something we will be keeping an eye on.

Experian's Latin American operations have continued to perform well, even in a difficult Brazilian economy. Partly this is because some of the group's revenues are derived from chasing up late debt payments; which are on the rise. It also reflects the power of Experian's brand and dominant market position in this region; which ought to leave it well positioned once economic conditions improve. The strong growth in the Decision Analytics and Marketing Services divisions suggest the market still has a long way to run, with news that the company has begun the roll out of its Consumer Services offering also welcome.

Unsurprisingly, the Brexit vote has had little impact on the company so far, and with only 20% of group revenues originating in the UK we would expect this to continue. One upside from the vote for Experian shareholders to consider is that, as a dollar reporter, the recent fall in sterling will boost the value of the dividends in sterling terms.

The group trades on a price to earnings ratio of 21 x for FY17, falling to 17.4x by FY19, on analysts' forecasts. The prospective yield is 2.1%, with the dividend having grown every year since listing in 2006. Although remember past performance is not a guide to future returns.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.