Shares in RELX (LSE: REL) have fallen by 25%. The broad market crash has not spared this provider of information-based analytics and decision tools for professional and business customers.
RELX publishes journals, databases, and reference sources for scientific and medical researchers. It helps companies make insurance decisions, and provides data and analytics for business decisions.
The bulk of RELX’s revenues are delivered digitally and through subscriptions, and often account for less than 1% of its customers’ cost bases. The benefits to customers far outweigh the costs, because the content and solutions provided are mission-critical.
Too far, to fast?
Investors have sold up because they believe RELX will lose revenues and suffer lower earnings as a result of the outbreak of the coronavirus. I agree that this will be the case. However, I am sceptical about the extent of the damage implied by the share price decline.
RELX’s exhibition revenue is at significant risk because it relies on face-to-face contact. However, exhibition revenue only accounted for 16% of total revenue for 2019. The bulk of revenues should not suffer quite so much.
I imagine a scenario whereby 2020 exhibition revenue does fall significantly compared to 2019. Many events will be cancelled or poorly attended in 2020. Recovery will take much longer once things get back to normal.
For the other 84% of RELX’s revenues, I see a much more modest decline in 2020. Some components of RELX’s business, like risk analytics and activities supporting medical research, may see increased demand, offsetting weakness elsewhere.
The question is by how much revenues and earnings will decline in 2020? If we can hazard a guess to the magnitude of the fall, then we will be in a position to judge if the fall in the share price was overdone.
Model behaviour
A straightforward model can help put things in perspective. If we assume that operating margins for the four segments will be maintained, then the effects of various revenue drops on operating profit can be analysed.
Using the debt due within a year, as reported in the 2019 annual report, a 2020 financing cost of £411m can be estimated. With a finance cost, an effective tax rate of 21.7% (again lifted from the 2019 report), and assuming stable share counts and non-controlling interests, a 2020 EPS can be estimated.
Assuming that exhibition revenues fall by 75% in 2020 compared to 2019, and everything else declines by 10%, I estimate 2020 EPS at 64.7p. If the declines are gentler, at 50% and 5%, then a 2020 EPS of 72.3p is forecasted.
Given the current share price of around 1,550p investing now means paying somewhere between 21 and 24 times estimated 2020 EPS.
Worth a buy?
Back in February, before the markets crashed, investors were willing to pay 2,099p for shares in RELX. At that price, investors were paying 27 times 2019 EPS of 76.90p to get a slice of ownership. Also, a yield of 2.06% on RELX shares was deemed satisfactory in February.
The yield, assuming no dividend cuts, could now be as high as 2.79%.
There are a lot of assumptions in the model I have used. The estimates of 2020 EPS are likely to be wrong but I think they are reasonable. Things could change in the coming days, weeks, and months. The share price could fall further.
But right now, RELX looks cheap based on a forward (estimated) price-to-earnings multiple and offers a potentially decent dividend yield.
