RELX: Business Remains Strong, But Now Looks Overvalued (Rating Downgrade)

seekingalpha06-04

RELX's exhibitions division is recovering from the pandemic, but the shares are now overpriced, leading to a "sell" rating.The company's overall business has shown progress and growth, with all four ...

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JHVEPhoto U.K.-based professional services group RELX (NYSE:RELX) has an attractive business that has continued to perform strongly, and even its exhibitions division is now close to putting the tough years of the pandemic and beyond behind it. I continue to consider the investment case as attractive, but see the shares as overpriced now, and am accordingly cutting my rating to “sell”. I last covered the name in my bullish Jan 2022 piece, RELX: Improving Performance Underlines Investment Case. Since that was published, the London share price has moved up by 52%. At the time of my last (and previous) pieces, my basic thesis was that RELX benefitted from ongoing revenue potential in areas with wide moats like legal publishing. While the pandemic had hit its exhibition business badly, that was on a long-term recovery track, though it remained to be seen to what extent the in-person exhibition model would persist in future. 2023 was a year of progress The business model has been extensively covered in other pieces (a good primer is The Wolf Report’s RELX: Consulting Appeal, But Only At A Good Price) so I will not rehash it here. Last year was a solid one for the company. Revenues, earnings, and cash flows all moved up. Net debt was slightly reduced, though at £6.5bn it remains significant but fairly small given the company’s market capitalisation of almost ten times that amount.   Company announcement That growth was broad-based. All four business units grew their revenue and adjusted operating profit, with the exhibitions division roaring back, especially at the adjusted operating profit level.   Company announcement Putting this into a longer-term context, we see that RELX has now firmly moved on from the pandemic. The only part of the business still underperforming its 2019 level is the exhibitions division, and even there, the shortfall versus 2019 is not of such magnitude that I think it affects the overall valuation of RELX.     2019 2023 variance   Revenue (£m)         Scientific, Technical & Medical 2,637 3,133 19%   Risk & Business Analytics 2,316 3,062 32%   Legal 1,652 1,851 12%   Exhibitions 1,269 1,115 -12%             Adjusted operating profit (£m)         Scientific, Technical & Medical 982 1,165 19%   Risk & Business Analytics 853 1,165 37%   Legal 330 393 19%   Exhibitions 331 319 -4%   Unallocated central costs and other operating items - 5 - 12 140%   Click to enlarge Table calculated and compiled by author using data from company announcements Will things continue in the positive vein? The pandemic showed the clear risk to the exhibition business of any sudden drop in business travel, a risk I continue to see as key for that division despite increased moves into online conferences. Some online conferences and exhibitions have value, but some exhibitions are all about pressing the flesh, in my view. I also see an economic slowdown as a risk for the business. Its client base includes a lot of professional services firms like law partnerships and insurance businesses. Some of their expenditure is business critical, but when the economy does badly, a lot of it is apt to be cut or postponed. That would hurt RELX. Further Dividend Growth is Likely A rising share price has meant a lower dividend yield. Currently, that stands at 1.7%, less than half the FTSE 100 average.   Chart compiled by author using data from company announcements RELX has been raising its dividend at a decent rate (over 7% last year) and I expect it to continue doing so. Last year, free cash flows excluding financing costs were £1.8bn. Financing outflows were £2.1bn, of which £1.1bn was shareholder dividends and £0.8bn was share buybacks. Excluding the buyback, then, the dividend cost was amply covered with substantial room for future growth if cash flows remain broadly in line. Valuation Looks too High In recent years, RELX seems to have won friends among the investor community, with its strong investment case and ongoing strong business performance. Indeed, over the past year alone, the share price has moved up by 34%. That makes for an 84% increase over the past five years. But that has pushed the price-to-earnings ratio up to 37. That looks unreasonably high for me. It prices the company as if it is set to deliver significant growth. While RELX has shown creditable growth over the past few years, this is a mature business in mostly mature business areas like legal information and exhibition organisation. The organic growth opportunities here are surely limited over the long term, although ongoing growth through acquisition is a possibility. A strong moat in some businesses (LexisNexis is an example) gives good pricing power, but nonetheless I see RELX as a business with fair ongoing growth opportunities rather than as a strong growth story per se.  On that basis, I would be more comfortable with a P/E ratio no higher than 20, and accordingly change my rating to a “sell” not because of the business quality but due to valuation concerns.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2440023837"}