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Experian - revenue guidance shifts up

Nicholas Hyett, Equity Analyst | 8 September 2020 | A A A
Experian - revenue guidance shifts up

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Experian has updated its expectations for second quarter revenues. Where it had expected revenue growth of between -5% and 0% it is now looking at growth of 3% to 5%. That reflects continued strength in the US mortgage market.

Continued investment means costs are expected to rise 2-3% in the first half.

The shares rose 2.6% in early trading.

View the latest Experian share price and how to deal

Our View

Experian is caught between two competing forces.

On the one hand demand for data driven decision making has never been higher, and Experian is right at the heart of that trend. However, many of the group's customers are very cyclical. That means economic conditions are going to impact revenues, and the economic backdrop is likely to remain challenging for some time.

Having said that, the US in particular is currently showing signs of a robust recovery. Credit checks are still Experian's bread and butter and US mortgage lending along is expected to contribute 3 percentage points of the 3-5% revenue growth the group is expecting this quarter.

Longer term, we think the current crisis will accelerate many existing trends, from online shopping to working from home. Most of them generate a huge volume of data, or require significant data analysis to function effectively. That can only be good news for Experian.

Historically Experian has been good at exploiting new markets. New healthcare and automotive businesses were boosting business-to-business (B2B) sales before the pandemic. While Automotive sales will always struggle in an economic downturn, the new sectors should provide long term growth opportunities. Latin America has also been a particular success, accounting for around 16% of profits last year despite economic and political turmoil in Brazil, the region's biggest market.

After year of disruption from "free credit check" rivals we also think the consumer business has turned a corner, although coronavirus seems to have disrupted progress in the UK.

In the US, Experian's free membership has been driving increased cross-selling of advanced credit products and price comparison services. The 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.

Given the large quantities of sensitive personal data Experian holds, perhaps our biggest concern (aside from a coronavirus driven economic 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 long term growth trajectory is testament to its willingness to innovate and enter new markets.

Unfortunately that potential comes at a price, with a price to earnings ratio well above the long run average. That adds a degree of short term risk and means the shares offer a prospective yield of just 1.3%. Anything other than perfect delivery risks a de-rating and painful share price fall.

Experian key facts

  • Current 12m forward P/E ratio: 36.1
  • 10 year average 12m forward P/E ratio: 20.2
  • Prospective yield: 1.3%

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First Quarter Trading Update - 16 July 2020

Experian's underlying revenues fell 2% in the three months to 30 June, with growth in North America and Brazil partially offsetting declines in other geographies.

The group expects second quarter underlying revenue growth to be in the range of flat to -5%, while costs remain unchanged.

Underlying revenues in North America rose 4% in the first quarter, accounting for 63% of the group total. That was driven by a 10% rise in Consumer Services, where identity monitoring and credit education products performed particularly well. Business-to-business (B2B) sales grew 1%, reflecting strong mortgage volumes and demand for Experian's Ascend Decisioning and Analytics platform.

Latin American underlying revenues fell 1% year-on-year, and accounted for 14% of the group total. Again Consumer Services was the standout performer, with growth in the Brazilian business of 104% - albeit from a relatively low base. B2B sales fell 5%, affected by fewer credit reference requests and weaker demand in Spanish Latin America.

The UK & Ireland (15% of group revenue) saw underlying revenue fall 15%. Consumer Services revenue fell 18%, with credit monitoring subscriptions falling at the beginning of the quarter. B2B sales fell 15%, as lending declined significantly. There were some signs of recovery later in the quarter.

EMEA/Asia Pacific saw sales fall 20%, and accounted for 8% of the group total. EMEA was severely impacted by the coronavirus outbreak, particularly in Italy and South Africa. In Asia Pacific, India was particularly hard hit, although some recent product wins should deliver results in the next financial year.

Given the current uncertainty the group is not producing guidance for the full year.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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 for more information.