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Experian - Strong growth, dividend unchanged

Nicholas Hyett, Equity Analyst | 20 May 2020 | A A A
Experian - Strong growth, dividend unchanged

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Experian Plc Ordinary USD0.10

Sell: 2,575.00 | Buy: 2,578.00 | Change -43.00 (-1.64%)
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Full year underlying organic revenues rose 8% to $5.2bn, with particularly strong growth in the fourth quarter. Operating profits rose 9% to $1.4bn.

Despite some disruption, with the majority of staff now working from home, the coronavirus outbreak has so far had a limited effect on financial performance. However, the group saw organic revenues fall 5% in April, and given current uncertainty is not providing guidance for the coming financial year.

The final dividend remains unchanged year-on-year at 32.5 US cents per share. The group has suspended its share buyback programme.

Experian shares rose 6.7% in early trading.

View the latest Experian share price and how to deal

Our View

Experian's purely digital product means it has so far weathered the current crisis rather well. While April's sales have fallen year-on-year, it's a modest decline when compared with what other companies have seen.

Credit checks are still Experian's bread and butter. That could provide a short term boost if individuals borrow money to weather the immediate crisis, but it also makes Experian cyclical. If the economy slows, lending activity will likely fall and so will Experian's revenues. The level of uncertainty over what the future holds means the group isn't providing any guidance for the current financial year.

Fortunately, big data is playing an increasingly important role in all walks of life, and Experian's putting its formidable expertise to work in other areas too.

Business-to-business (B2B) sales are growing nicely, helped by expansion into new geographies and new markets like healthcare and automotive. Latin America has been a particular success, accounting for around 16% of profits last year despite economic and political turmoil in Brazil, the region's biggest market.

The consumer division is also turning a corner. A few years ago rivals began offering free consumer credit checks in the US and UK, undermining Experian's subscription service and blowing a massive hole in the higher margin consumer business. Experian's own free product is starting to drive increased cross-selling advanced credit products and price comparison services. The recent US launch of 'Experian Boost', where consumers supply additional non-standard data like mobile phone and utility contracts to boost their credit ratings, has been something of a masterstroke. Not only have CreditMatch sales improved substantially, but it also provides Experian with a unique and wholly new dataset for its business-to-business division.

With both the US and UK Consumer businesses back in growth, albeit from a far lower level, investors can return their focus to the secular growth in the B2B business.

Given the large quantities of sensitive personal data Experian holds, perhaps our biggest concern (aside from a coronavirus driven slowdown) is the group's exposure to cybercrime. Rival Equifax has already been caught out, and higher regulatory costs would be far from ideal.

Nonetheless, we believe Experian is a high-quality business with a bright future. Big data is an increasingly important part of an ever-growing number of industries, and Experian's steady growth is testament to its willingness to innovate and enter new markets.

Unfortunately that potential comes at a price, a price to earnings ratio of over 30 times is well above the long run average. That adds a degree of short term risk, because anything other than perfect delivery risks a de-rating and painful share price fall, and means the shares offer a prospective yield of just 1.6%.

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Full Year Results

Experian's business-to-business (B2B) operations saw organic revenues rise 7% in the year to $4.1bn, while B2B operating profits rose 8% to $1.2bn. The division enjoyed particularly strong growth in Data, following the launch of new Ascend product lines, with Decisioning growth in the US and Latin America offset by weakness in the UK & Ireland.

Consumer Services saw revenues rise 10% to $1.1bn, with operating profits up 19% to $257m. That reflects strong sales growth in North America and Latin America, with Experian Boost driving growth across the pond. Total free memberships rose from 55m to 82m year-on-year, with continued growth in credit marketplace products in the UK and US.

Underlying free cash flow fell 14.7% to $774m, reflecting increased capital expenditure and an increase in outstanding bills relating to the coronavirus outbreak. Net debt rose 19.0% year-on-year to $3.9bn following $700m of acquisitions during the year. Net debt to cash profits at the year end stood at 2.2 times, in the middle of the 2-2.5 target range.

Experian had access to $2.4bn of undrawn bank facilities at the year end.

Find out more about Experian shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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 disclosure for more information.