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Experian - resilient performance in face of disruption

Nicholas Hyett, Equity Analyst | 17 November 2020 | A A A
Experian - resilient performance in face of disruption

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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 reported first half revenues of $2.5bn. That reflects organic growth of 2% as good results in North and South America offset weakness in the rest of the world. Underlying operating profits of $648m rose 1% at constant exchange rates.

Experian announced an interim dividend of 14.5 cents per share, flat year-on-year.

The shares rose 1.1% in early trading.

View the latest Experian share price and how to deal

Our View

The pandemic has presented a bit of a mixed picture for Experian.

One the one hand customers in the group's business-to-business (B2B) divisions are often very cyclical. Credit checks are still Experian's bread and butter and lending dried up dramatically during the peak of lockdown. Demand for its targeted marketing expertise also tends to boom and bust with the economic cycle.

However, the recently revamped Consumer business has been a surprise winner after a long period in the doldrums. Credit matching in particular has become more attractive as banks become less willing to lend and consumers have a more pressing need for the best possible deal.

The consumer recovery is focused on North America, and we suspect the introduction of Experian Boost in the US is a key driver of performance. Experian Boost allows consumers to add new data sets, such as utilities bills and Netflix subscriptions, to their credit reports. That's likely doing a lot to improve awareness and engagement, while also helping Experian's customers deliver more tailored credit decisions.

Hopefully the trend can be repeated in the UK & Ireland - where Consumer remains something of a dog.

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.

Given the large quantities of sensitive personal data Experian holds, perhaps our biggest concern (aside from a short term economic slowdown) is the group's exposure to cybercrime. Rival Equifax has already been caught out, and Experian was recently rapped on the knuckles by UK regulators for breaching GDPR rules in its UK marketing business. That could lead to a very substantial fine, and any increase in 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 increases the short-term risk and means the prospective yield is just 1.3%. Anything other than perfect delivery risks a de-rating and painful share price fall.

Experian key facts

  • Price/Earnings ratio: 36.9
  • 10 year average Price/Earnings ratio: 20.6
  • Prospective dividend yield (next 12 months): 1.3%

All ratios are sourced from Refinitiv. 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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Half Year Results (Constant Exchange Rates)

North American reported revenue of $1.7bn in the first half, with organic growth of 7%. That reflects good progress across all divisions, but particularly Consumer where revenues rose 13% as uptake of subscription services increased and a tighter lending environment led to an increase in credit matching activity. Operating profits in the region rose 12% to $610m.

In Latin America sales rose 5% to $278m, again driven by strength in Consumer partly offset by weakness in the credit bureaus business. Operating profits fell 4% to $65m, reflecting the shift towards lower margin consumer business.

The UK & Ireland saw sales fall 12% to $331m, with declines in both business-to-business (B2B) and consumer sales. Both business lines suffered from a reduction in lending to consumers. Operating profits of $34m fell 54.7%.

EMEA/Asia Pacific revenues fell 2% to $191m, down 18% once recent acquisitions are excluded. That reflects a significant decline in lending activity in the early part of lockdown and delays to investment decisions impacting revenues. The division reported a $33m operating loss, compared to a $5m loss a year ago.

Lower capital expenditure in the half and good control of working capital meant free cash flow more than tripled to $411m. Net debt remained broadly unchanged at $3.9bn.

Experian expects revenue growth of 3-5% in the third quarter.

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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 Refinitiv. 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.