Mr. Market Is Too Emotional About Informa
Using GuruFocus List of Gurus is great for idea generation. One guru I admire is David Herro (Trades, Portfolio). I recently wrote about one stock he owns in his Oakmark Intl Small Cap fund. Exploring another of his portfolios, the Oakmark International Fund, I noticed he has recently added a new holding in a company I know well through using its products and services, which is Informa PLC (LSE:INF).
The company is a British multinational publishing and events company that operates several different publishing brands around the world. The company has five operating divisions: Informa Markets, Informa Connect, Informa Tech, Informa Intelligence and Taylor & Francis.
I happen to know Informa Connect as Ive been involved in some the events that it has run. The employees I dealt with were professional and competent and the events were a great success. I found that Informa is one of the worlds leading event organizers with access to a vast portfolio of expert speakers around the world. I also know Taylor & Francis, publisher of the Financial Analysts Journal for the CFA Institute, of which Im a subscriber. The quality of the journal is good, and I intend to never give up my subscription. In short, Informa is tied closely to many trade events and publications which are mainstays in their respective industries. This, for me, is a source of competitive advantage, a high switching cost to use Michael Porters terminology.
So, in keeping true to the Peter Lynch idea of buying stocks where you know the product, I thought I would dig a bit deeper into the company.
Capital Markets Day
Informa recently held a Capital Markets Day with the title: "Growth Acceleration Plan II." Here the company announced the divestment of its data and consultancy business Informa Intelligence, which owns fund flow data business EPFR that is used by many macro investors and quantitative analysts and Lloyds List, which is a famous brand within the maritime industry. Informa intends to distribute 1 billion pounds ($1.3 billion) of embedded value to shareholders through the combination of a share buyback program and a special dividend following the completion of divesting this division.
Informa didnt put a valuation target on its intelligence business, but analysts at Citi believe it will sell for 2 billion pounds, which gives Informa 1 billion pounds to reinvest.
Informa plans to use the remaining proceeds to buy back debt and invest in its two broad areas: academic publishing (Taylor & Francis) and its trade show/events business. I actually like this focus on two growth businesses where Informa has leadership positions and scale.
Citi forecasts this will make Informa practically debt-free by the end of 2023. This is badly needed because, currently, Informa has a weak financial situation with an Altman Z-Score of just 1.1, putting it in distress, but obviously this number doesnt factor in the effects of the forthcoming divestment. Net debt of 1.9 billion pounds at the end of June stood at 6.2 times adjusted earnings, so clearly a deleveraging is in order, especially with the uncertainty around near-term, in-person events and conferences, which becomes a bigger proportion of its business following the sale of the intelligence unit.
Informa has been a Covid-19 loser. The collapse in events-related revenue, which made up 65% of group sales before the pandemic, along with an impairment of almost 600 million pounds to account for all the associated disruption, saw the group show an 880 million pounds loss last year.
Luckily, Informas events business is global in nature, so it is not too exposed to any one region. For example, events revenue from China, which reopened first, has rebounded more quickly than events revenue from North America.
As the pandemic has not yet gone away, obviously, Informa is still trading below 2019 levels. Last month, sales generated from its three events-related businesses came in at half of 2019 levels. Management has guided this could recover to 65% to 80% next year. At the group level, revenue and adjusted operating profit are expected to climb to 1.8 billion pounds and 375 million pounds this year.
Management thinks it will be 2024 before trading is expected to beat 2019 (excluding the intelligence division).
The stock has a Piotroski F-Score of 4, which isnt too bad given the effects of the pandemic on the business.
Herro in October said of Informa:
"We believe the tradeshow business is underappreciated and likely to create value for the company."
I have already noticed some conferences I like to attend are being advertised as in-person for 2022, and people will want to socialize once Covid-19 dies out.
The group aims to capture more of its customers external marketing spending outside of trade shows by providing its customers with data analytics around their potential customers and identifying businesses that could be buyers of a customers product or services.
On the Taylor & Francis side, Informa wants to double the underlying revenue growth rate to at least 4% for the academic publishing business, driven by the fast-growing Open Access research publishing market.
Given the disruption of the pandemic and the forthcoming divestment, its very difficult to use a multiples approach to valuation using 2021 or even forecast 2022 financials. Citis 2024 forecasts value the company at 7.7 times enterprise value/Ebitda, which seems quite cheap for a media business that is a leader in its field.
The stock is down 7% year to date. It seems to be a case of Mr. Markets emotions not looking through the pandemic and not appreciating the refocusing of the business. With Herro buying, and the portfolio optimization going on at the company, Im putting this stock firmly on my watchlist. Awaiting more information when Informa reports its full-year results on April 22, 2022.
This article first appeared on GuruFocus.
