BUY: Experian (EXPN)
The credit checker is navigating tighter lending standards with apparent ease, writes Jemma Slingo.
Data services provider Experian managed to increase its profits across all regions in the first half of its financial year, with both the business-to-business (B2B) and consumer divisions performing well.
Total revenue rose by 5 per cent to $3.4bn (£2.7bn) in the period and adjusted operating profit was up by 6 per cent to $928mn. Statutory operating profit leapt by 56 per cent, but this was largely down to a $152mn goodwill impairment in 2022, which did not rear its head again this year.
There were concerns that tight credit conditions would affect demand for Experian’s services, and disappointing results from TransUnion last month further spooked investors. However, the consumer business still managed to attract 21mn new free members and entice more premium subscribers in the US. It achieved organic revenue growth of 6 per cent.
Meanwhile, the B2B arm added to the depth and breadth of its data sets, which helped to offset “weaker credit issuance conditions across some client categories in the USA and the UK”. Fraud prevention and credit risk tools did particularly well, and organic sales rose by 4 per cent.
Latin America continues to be a key market for Experian. The region — now the group’s second-biggest — delivered organic sales growth of 11 per cent, as consumer memberships jumped and demand from small- and medium-sized enterprises strengthened. However, the mature North American market also put in a good showing, increasing organic revenue by 4 per cent.
Experian does not come cheap: it trades on a forward price/earnings ratio of 22. However, this is below its five-year average of 28 and the company is proving its resilience and consistency in difficult economic conditions.
HOLD: Imperial Brands (IMB)
The company is returning a big chunk of its market cap to shareholders, writes Christopher Akers.
Imperial Brands continues to produce results for income investors. The tobacco giant pointed to a “material step up in shareholder returns” in its results, as it increased its annual dividend for the third year in a row and continues with a £1.1bn buyback programme. Backing the return of capital is strong cash generation, with free cash flow coming in at a very healthy £2.4bn, even if this was an 8 per cent drop year-on-year.
While pricing power was apparent in the Davidoff and Gauloises cigarette maker’s decision to hike tobacco prices by 11 per cent, and the company took 10 basis points-worth of market share growth in its top five priority combustible tobacco markets, this resulted in an unimpressive statutory revenue performance as volumes struggled. Tobacco volumes fell by 10.4 per cent year-on-year, due to “weakness in US mass-market cigars” and the exit from Russia last year, with revenues down 5 per cent.
The financial impact of the Russia retreat was also apparent in the statutory operating profits, which surged by over a quarter to £3.4bn because of the non-repeat of charges relating to the disposal of Russian assets in the comparative period.
The next generation products headlines were positive, with vape, heated tobacco, and oral nicotine items delivering a revenue uplift of a third, but the performance was mixed. Growth was driven by European markets, where net revenues were up 40 per cent. There were less impressive postings across the Atlantic, though, with US net revenues down by a fifth on the back of the Food and Drug Administration’s tougher regulatory approach to new products.
The division’s adjusted losses widened by 48 per cent to £135mn, which management attributed to higher investment levels stemming from new product and market launches.
The surge in statutory earnings was driven by the distribution segment, which contains the company’s stake in Spanish-listed distributor Logista. Revenue was up 11 per cent to £10.8bn, with adjusted operating profits rising by 21 per cent.
Management guided that 2024 performance would be weighted to the second half, which analysts at RBC Capital Markets said “makes us nervous”. The board forecasts constant currency revenue growth in the low single-digits and adjusted operating profits growth in the mid single-digits.
The shares trade hands at only six times forward consensus earnings. This cheap valuation, combined with a high dividend yield, reflects the market’s fears about regulatory issues and the secular decline in tobacco smoking.
HOLD: British Land (BLND)
The initial reaction to the commercial landlord’s results was positive, but the full picture is less rosy, writes Mitchell Labiak.
Investors like steady companies. So it makes sense that British Land’s share price rose 5 per cent on the morning the real estate investment trust (Reit) posted a stabilisation of its property value in its half-year results following a poor 12 months.
The Reit’s portfolio of offices, retail assets, warehouses and other buildings dipped 2.18 per cent over six months, from £8.9bn on March 31 to £8.7bn on September 30, as high interest rates continue to hamper buyers’ budgets. However, the drop was much less dramatic than the 15 per cent valuation plummet it posted over the year to March 31, a period when interest rates rocketed following former prime minister Liz Truss’s “mini” Budget.
Meanwhile, the news on rental income was mixed. On the one hand, the company said it had signed leases for 1.6mn square feet of space at 12.2 per cent above market value and is “under offer” to lease a further 1.1mn sq ft of space at 16.6 per cent above the market. As such, it expects rental growth to be at the top end of its 2024 guidance.
On the other hand, such promises may sound like jam tomorrow to investors when gross rental income is down 2.77 per cent. Net rental income was flat only because of a reduction in costs. Chief financial officer Bhavesh Mistry told Investors’ Chronicle its downbeat performance was due to its selling of some assets as it “recycles capital out of non-core areas”. In other words, the multibillion landlord is offloading assets with lower rental growth potential and buying ones with higher potential.
But even if this buying and selling is stripped out, like-for-like rental growth has only climbed 2.4 per cent, a paltry increase when compared with the rental performance of other Reits. It also does not bode well that analyst Shore Capital is forecasting a drop in Ebitda and only a small bump in revenue for 2024. The analyst anticipates investors will need to wait until 2025 before adjusted earnings per share start to grow again.
Bad as all this sounds, we believe most of this has already been factored into the share price. As has been the case for several years now, British Land’s discount to net asset value is sizeable, and so is its dividend yield. We are still not bullish enough on this stock to rate it as one investors should double down on, but there are some tentative signs it is close to the bottom.
