Portfolio Update – RELX Purchase

Update on the latest addition to the Global Income & Growth Fund…

During November we initiated a position in RELX in the TB Saracen Global Income & Growth fund.  We have owned RELX (or Reed Elsevier as it was known then) in the past and have followed the company for years.  It has remained on our Wish List due to its sustainable revenue growth, cash conversion, progreesive dividend payments, good balance sheet and strong ROIC.  The sectors where RELX operates have long-term attractions.  Within its four divisions it is exposed to academic research and the publication of high end journals (STM), Risk & Business Analytics, Legal Analytics and Exhibitions.  The Data Analytics side in particular offers strong growth potential, due to the ever more complex world we live in and the need of companies to have a greater understanding of their customer base.

We delayed purchasing shares for two reasons. Firstly, we wanted to fully understand the risks attached with regards to a shift in business model in the STM division from subscription only to open access.  Secondly, our apprehension was based on the valuation of the shares: we required a greater certainty of the risks on our earnings forecast.  In our proprietary Worst Case modelling the potential downside risk was too big.  However, after various contacts with the company in recent months we are much more reassured about RELX’s positioning and the outlook for academic journals.

Most importantly, we feel that the appointment of a new divisional CEO in February 2019 led to a change on RELX’s side of the contract negotiations. Since then, we have seen one big dispute with the Dutch universities settled and we expect the two main outstanding contracts in Germany and the University of California to be settled in due course.  It also became apparent in our conversations that a move to open access will not have a negative impact on margins.

The perceived risks have impacted valuation in recent years and led to some derating of RELX.  In addition, in 2020 the Corona virus has adversely impacted the Exhibition division but it is our belief that the demand for physical exhibitions will return farily quickly and strongly once restrictions are lifted. The rollout of vaccines means that 2021, especially H2, should see a much better growth and margin profile than 2020.

During this crisis RELX has experimented with virtual exhibitions and the uptake has been surprisingly positive.  This could be seen as an extension to the existing business, which again could help contribute to a rerating of the shares.

Conclusion

At Saracen we like to buy high quality businesses at attractive valuations.  With our increased comfort in RELX’s strategy, especially within STM, we felt that RELX shares had reached a buying level in recent weeks with a renewed sell off resulting in the 2021 PE ratio slipping below 17x.  At the same time the dividend yield is a solid 2.5% and the company has avoided a dividend cut during 2020.

Additionally, the ROIC profile remains strong at  close to 20%.   We initiated a 1.5% position, which we will increase on any share price weakness.

Graham Campbell (graham@saracenfundmanagers.com)

Bettina Edmondston (bettina@saracenfundmangers.com)

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