Hogg Robinson: H2 Margin Spur

Hogg Robinson (HRG.LSE) hit the spot in FY13 with impressive margin gain comfortably offsetting market pressures on revenue. In the current year we expect more of the same, if less marked, driven by continued cost control and a strengthening of HRG’s technology offering, which is enhancing an already resilient model. The cut in PBT forecast from £40.5m to £35.5m is due mainly to IAS 19 revision and is arguably cautious on trading grounds.

H2 margin spur
An 11% trading profit gain in H2 on 7% lower revenue (both constant currency) is further proof of the effectiveness of HRG’s fee-based model as well as improved productivity (revenue/employee +1%). The H2 trading margin (15.0% vs 12.7%) was boosted by cost control, technology sales and online self-booking, exceeding even our bold assumptions. For the year, HRG secured net new business wins, importantly across multiple sectors, and held its longstanding high client retention rate. The sharp rise in period-end net debt was expected and entirely a function of the planned exit from the active working capital programme, while the IAS 19 pension cost was up only £1.2m despite the £14m increase in deficit to £159m.

Holding steady
Despite maintained revenue assumptions (constant currency -2%) for FY14, we are now looking for a smaller improvement in trading margin, ie up from 14.2% to 14.4%, not 14.6%, attributable to continued difficult conditions and management’s newly-stated KPI range of 13-14.5%. Thus, forecast trading profit is stable before the c £1m currency boost. However, last year’s striking margin success suggests this may be pessimistic. Longer-term action to reduce costs (locations, back-office functions etc) in the light of structural changes, notably self-booking, will involve a likely £6.5m exceptional charge in the current period. But net debt is still expected to decline to £80m by March 2014, ie 1.3x EBITDA, which is well within covenants. Management has advised that the revision to IAS 19 would have depressed FY13 PBT by £3.4m (comparatives will be restated), as opposed to £3.6m charged in the current year, as shown above.

Valuation: Stubbornly cautious
HRG’s FY14 P/E rating is low (7x) compared with that of the All-Share Support Services sector (c 16x). Such a discount appears excessive, despite investor caution about corporate travel service earnings (repeatedly proven to be overdone), the company’s pension deficit (further action being taken) and the concentration of top shareholdings. HRG is securely financed, cash generative and committed to a generous dividend policy (the yield has strong cover of 3.5x).

To Read the Entire Report Please Click on the pdf File Below.