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Experian - Americas drive better than expected result

Nicholas Hyett, Equity Analyst | 19 January 2021 | A A A
Experian - Americas drive better than expected result

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Experian Plc Ordinary USD0.10

Sell: 2,498.00 | Buy: 2,501.00 | Change -13.00 (-0.52%)
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Experian reported organic revenue growth of 7% and total revenue growth of 10% in the third quarter. That reflects good results in the Americas, especially in the consumer business, and is ahead of management expectations.

The group now expects fourth quarter revenue growth of 3-5% - with full year operating profit of $1.36bn-$1.38bn.

Experian shares rose 2.3% in early trading.

View the latest Experian share price and how to deal

Our View

Credit checks are still Experian's bread and butter, and that tends to be a cyclical business - with banks reluctant to lend and customers afraid to borrow when the economy takes a downturn. Similarly demand for its targeted marketing expertise will boom and bust with the economic cycle.

It was no surprise then when lending dried up dramatically in the first quarter of the year and revenues turned down.

However, since then the recovery has been remarkable. Mortgage volumes have held up well in the US, and products servicing the US healthcare market have delivered the steady growth expected throughout the cycle.

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

In North America consumer's been helped by the introduction of Experian Boost. 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.

It remains to be seen whether Experian can repeat the trick in the UK & Ireland - where Consumer remains something of a dog - but progress in Latin America is stellar with revenues more than doubling.

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. Newer 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.

We also worry about the lack of progress on margins - especially given the company's PE ratio is now some 53% ahead of its long run average. Third quarter results encapsulate the problem nicely. Sales were ahead of expectations but profit guidance is unchanged - suggesting margins have actually deteriorated. That can perhaps be forgiven in the middle of a crisis, but ultimately the group needs to deliver steady and ideally growing margins to justify its valuation.

Experian key facts

  • Price/Earnings ratio: 32.0
  • 10 year average Price/Earnings ratio: 20.9
  • Prospective dividend yield (next 12 months): 1.4%

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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Third Quarter Trading Update

North American organic revenue rose 9% in the third quarter, with business-to-business (B2B) revenue up 6% and consumer revenue up 18%. Total revenue rose 11% following the acquisition of Tapad in November. Strength in Mortgage volumes and analytics platform Ascend more than offset weakness in unsecured lending and marketing data. In consumer the region reached 38m free memberships, with 5.7m Experian Boost customers.

Revenue in Latin America rose 13% on both an organic and reported basis. B2B revenue rose 2%, despite lower credit bureau volumes, as Ascend and automotive performed well. Consumer revenues rose 178%, with Brazilian free memberships hitting 56m.

Sales fell 2% in the UK & Ireland. However, that's significant improvement on the first and second quarters (when sales fell 15% and 8% respectively). Recovery has been driven by increased new business, as the credit supply improved and consumer revenues returned to growth - rising 1%. Free memberships now stand at 8.9m and initial reaction to Experian Boost has been positive.

EMEA/Asia Pacific, Experian's smallest division accounting for 8% of group revenues, saw organic sales fall 11% (although total sales rose 16% thanks to the acquisition of Arvato Financial Solutions). EMEA saw some modest improvement in bureau volumes quarter-on-quarter, but Asia Pacific remains severely impact by the pandemic - particularly India.

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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.

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