SILVER BULLETS - Espirito Santo Investment Bank incorporating ...

THIRD QUARTER 2010
Wolters Kluwer
Strategy differences
As key competitors stepped up investments in the legal segment, the
risk of compression in Wolters Kluwer’s operating margins increases,
in our view. Wolters Kluwer is widely considered a defensive stock,
but we believe it is set to underperform peers in the near term. We
reaffirm our sell rating and raise our target price to target price of
€11.2 from €10.6 to reflect recent currency fluctuations.
Different strategy
Both Reed Elsevier and Thomson Reuters have guided for margin decline in their
legal divisions, over and above the below-the-line restructuring charges due to
recent M&A deals. In stark contrast, Wolters Kluwer expects "improved operating
margin” in 2010 though below-the-line charges increased (guidance of eu70m).
Such a difference in strategy (investment for growth VS savings/rationalization)
may arise from a different assessment on the potential economic recovery: the more
conservative the outlook, the lower the level of growth investments one would
expect. However, Wolters Kluwer’s track record seems to suggest that the company
is simply underinvesting which may lead to further pressure on organic revenue
growth and eventually on operating margins. Fig. 1 shows Wolters Kluwer’s legal
division margins compared to Reed Elsevier and Thomson Reuters. Our long term
margins are set below industry average because of higher fragmentation, by
geography (especially in Europe) and by product (compliance, tax, accounting,
regulatory, etc.). For Wolters Kluwer’s operating margins in 2010 we have used
company guidance rather than our forecasts.
Figure 1: Global legal segment - Operating margins by company
35%
33%
31%
29%
27%
25%
23%
21%
19%
17%
15%
1999
2000
2001
Source: ExecutionNoble, Company data
2002
2003
2004
2005
2006
2007
2008
REL - Legal TRI - Legal WKL - Legal
Our estimates are ~17%% below consensus
Our forecasts for organic revenue growth remain unchanged at 1.3% decline for
2010 qnd 0.5% decline for 2011, which we believe are broadly in line with
consensus. In the medium term we forecast group margin compression to 18%-19%,
below consensus and management guidance of 20%+, to reflect the need for the
company to start investing again in content, distribution platforms and sales force.
Valuation
On our forecasts (~17% below consensus for Ordinary EPS 2010-12E, on average)
Wolters Kluwer trades on ~5% premium to industry peers, based on P/E and FCF
yield. Due to its lower growth potential and further earnings downgrade risk, we
believe that Wolters Kluwer should trade on 20% discount to the sector average.
We reiterate our sell rating and raise our DCF-based fair value to €11.2 from €10.6
to reflect favourable currency fluctuations over the past three months.
2009
2010E
http://www.execution-noble.com
SELL
29% downside
Fair Value € 11.2
RIC, Bloomberg Code WLSNc.AS, WKL NA
Share Price € 15.8
Market Capitalisation €4,636m
Free Float 100%
(eu m) 2008A 2009A 2010E 2011E
Turnover 3,374 3,425 3,557 3,644
EBITDA 756 783 755 783
EBITA 678 682 650 676
Adj. EPS (EUR)* 1.47 1.45 1.29 1.35
Dividend (EUR) 0.65 0.66 0.66 0.67
FCF** 381 387 364 409
Net Debt 2,252 2,008 1,969 1,697
* fully diluted, ex. GW amortisation
** FCF = EBITDA - capex - NWC - int ex. - tax
2008A 2009A 2010E 2011E
EV/Sales*** 2.1x 2.0x 2.0x 1.9x
EV/Ebitda*** 9.5x 8.9x 9.3x 8.7x
EV/EBITA*** 10.6x 10.3x 10.8x 10.1x
P/E*** 11.6x 11.7x 13.1x 12.6x
Dividend Yield*** 3.8% 3.9% 3.9% 4.0%
FCF Yield*** 7.8% 7.8% 7.2% 8.0%
Net Debt/Ebitda 3.0x 2.6x 2.6x 2.2x
*** 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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