Reed Elsevier (REL LN/REN AS): Maybe there’s life in the old dog yet?

Reed Elsevier                                      Plc (REL.LN)                NV (REN.AS)
Share price                                                 511p                                  €9.0
Growth rating FY3                                  +2.9%                               +2.8%
Revenue CAGR FY1-3                            +3.6%                               +3.5%
Target CAGR FY3                                   +3.7%                                +3.7%
Target price                                              541p                                   €9.6
Upside                                                    6%                                       7%
Recommendation                                  HOLD                              HOLD

EVENT: Investor Seminar (this morning) where Reed Elsevier presented on its two B2B divisions. Reed Business Information (RBI) and Reed Exhibitions.



COMMENT: Accounting for under 20% of group FCF, these activities are generally seen mainly as potential disposal targets, particularly given Reed’s abortive (and belated) attempt to sell RBI in 2008.  Unsurprisingly, today’s presentations showcased the best of each operations. For Exhibitions, this was the c.27% of revenues generated from emerging markets such as Brazil and China, while for RBI the focus was on the 39% of revenues now generated from online professional information services such as Flightglobal (aviation information and valuation services) and BankersAccuity (banking information & workflow solutions).  Needless to say, these businesses  scored well in terms of growth, pricing power and margin potential and highlight the progress that has been achieved in moving these activities into faster growth and more stable earnings areas.  48% of Exhibition revenues however still come from Europe and RBI has not completely shed its exposure to print (44% of revenues) or  advertising (25% of revenues) – factors that continue to restrain the relative growth of the overall divisions.
VERDICT: Positive to see some top rate professional information businesses are being developed within what was hitherto a B2B silo and that RBI might deserve a slightly less punishing growth rating discount in its valuation.  Representing only around 6% of group FCF however, even halving the  relative growth discount (from -50% vs GDP to -25%) has little overall impact on the valuation, albeit it’s comforting to see the management find a few acorns.



RECOMMENDATION:   Reed still needs to demonstrate some strategic Oomph; on how it will turn around its ailing Legal     activities while defending its journal model from irate     mathematicians and open access/archives. Without such a catalyst, the shares seem range bound at the lower end of its 3-5% CAGR growth rating range.  In current markets however, a certain lack of     excitement may have a certain allure.  As Greece lurches ever closer to the brink and until France’s new president can find an accord with the rather frosty Bundesbank, a 7.5% Op FCF yield on a dependable plodder with a 6-7% prospective upside to our target price is already beginning to sound more interesting.

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