SILVER BULLETS - Espirito Santo Investment Bank incorporating ...

THIRD QUARTER 2010
Reed Elsevier
Trading buy ahead of numbers
We believe that Reed Elsevier will give a positive message at interim
results on 29th July: an improvement in the group’s organic revenue
growth could be accompanied by an encouraging outlook for H2
margins, in our view. We remain concerned long term, but we see a
short term buying opportunity.
Improving results
At the last trading statement in April, Reed Elsevier reiterated its previous trading
outlook: i) slower growth for the STM division; ii) weak revenue for the legal
division; iii) lower revenues for B2B, after adjusting for positive effect of biennial
shows; iv) modest reduction in 2010 group operating margin due to investments in
legal. But such conservative guidance hides a significant improvement from the 7%
organic revenue decline recorded in 2009, in our view. We forecast -1% revenue
growth in H1, though partly due to mechanical factors such as 1- the consolidation
of Choicepoint (~100bps contribution to group organic growth), 2- the change in
accounting standards of the directory segment (50bps positive contribution) and
3- the partial disposal of the business information plus cyclical recovery of the
exhibition units (400bps positive contribution).
Legal restructuring uncertain
Many more quarters will be necessary before the market will be able to judge on
the complete restructuring of the legal segments, but Reed Elsevier is moving in
the right direction, in our view. Increased focus on new products’ development
may succeed in filling the gap opened versus Thomson Reuters’ Westlaw during
the years of under-investment. However, our law librarian survey still shows no
significant improvement in preferences for Reed Elsevier. US legal headcount trend
has improved from 3.4% decline in 2009 to only 1.9% decline in May, but budget
expectations for 2010 are still conservative (please see Figure 1 below). Longer
term, we believe that increased competition from Thomson Reuters and continued
weakness in the reference market will put further pressure on margins.
Figure 1: Legal survey shows budgets under pressure
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-2.2%
Source: ExecutionNoble
Valuation
-3.8%
summer 2009 "panic"
-11.7%
-0.8%
-2.0%
-3.2%
Q109 Q209 Q309 Q409 Q1 10 Q2 10
Headcount Price Budget
Expectations
w orsening in 2010
On our estimates (broadly in line with consensus for EPS 10, but ~15% below
consensus on EPS 2011-12), Reed Elsevier trades in line with industry peers on PE
‘10E. The stock has underperformed the media sector by 10% since we upgraded to
hold in April and consensus EPS 2010 remained stable. We reaffirm our hold rating
and target price of 480p / eu8.4.
http://www.execution-noble.com
HOLD
4% downside
Fair Value 480p
RIC, Bloomberg Code REL.L, REL LN
Share Price 499.0p
Market Capitalisation £5,696m
Free Float 100%
(GBPm) 2008A 2009A 2010E 2011E
Revenues 5,334 6,071 5,939 6,075
Adj. EBITDA 1,340 1,540 1,699 1,704
Adj. EBITA 1,379 1,570 1,527 1,488
Adj. EPS (GBp)* 44.2 45.5 42.4 39.8
Dividend (GBp) 20.3 20.4 20.4 20.0
FCF** 889 780 954 986
Net Debt 5,767 3,972 3,673 3,184
* fully diluted, ex. GW amortisation
** FCF = EBITDA - capex - NWC - int ex. - tax
2008A 2009A 2010E 2011E
EV/Sales*** 3.2x 2.6x 2.7x 2.6x
EV/Ebitda*** 12.6x 10.1x 9.3x 9.3x
EV/EBITA*** 12.2x 9.9x 10.4x 10.7x
P/E*** 12.2x 11.8x 12.6x 13.4x
Dividend Yield*** 3.8% 3.8% 3.8% 3.8%
FCF Yield*** 8.0% 6.8% 7.9% 7.7%
Net Debt/Ebitda 4.3x 2.6x 2.2x 1.9x
*** adjusted for Pension, tax and other assets/liabilities
Analysts
Giasone Salati
+44 20 7456 1163
giasone.salati@execution-noble.com
Mark Evans
+44 20 3364 6753
mark.evans@execution-noble.com
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