RLXXF - RELX PLC: Accelerating Organic Growth Should Close Valuation Gap Vs. U.S. Peers

Summary

• RELX stock price does not reflect the company's accelerating growth, and the discount in valuation relative to US peers should close as the market recognizes this.
• Management expects future growth to remain above historical trends.
• The threat from ChatGPT on RELX, particularly in the Legal market, seems exaggerated, and the company's unique and hard-to-replicate data and information, along with its extensive and deep customer relationships.

Recommendation

A major factor in rating a buy for RELX PLC ( RELX ) is that the stock price does not reflect the company's accelerating growth. RELX has always had a high standard of quality, but its organic growth in the low single digits gave it a boring reputation. As a result of the improvement in growth, I think the discount in valuation gap relative to US peers should close. The fact that RELX has followed a similar growth pattern, and on a larger scale, should get the attention of investors (i.e., push up valuation).

Latest earnings highlights

RELX's organic growth in FY22 was at 9% with each segment performed mostly as expected. The Risk segment growth accelerated to 8%, and the STM and Legal segments grew in line with consensus. However, the Exhibitions segment's growth of 64% fell slightly below expectations. Total revenues came in at £8,553 million, and EBITA was £2,683 million, for margins of 31.4%. Adj EPS of 102.2p beat the consensus estimate of 101.6p. RELX also stated that it plans to repurchase £800 million shares of stock in 2023, which would amount to an additional £650 million purchases. Additionally, management has proposed raising the dividend payment for FY22 by 10%, to 54.6p.

Organic growth

Management have highlighted the speed with which STM, Legal, and Exhibitions are expanding. In particular, management is anticipating a long-term growth to exceed historical levels. Although RBA has seen a decline in transaction revenues for fraud as a result of the slowing economy, this has been more than compensated for by an increase in insurance, which is countercyclical. Excluding the Exhibitions, Legal and STM are on a growth trajectory that has pushed overall group revenue growth to 5-6%.

Exhibitions

Management anticipates Exhibition margins to return to 2019 levels by 2023. When RELX demonstrates profitability growing back to pre-covid levels, that's when RELX's plan to sell its Exhibition asset will become clearer, I believe. Since this is a lower-quality business, I believe that selling or spinning it off would help the valuation be reassessed. Fortunately, the management has confirmed that they regularly assess the existing portfolio, and their immediate objective for exhibitions is to attain a post-pandemic revival and recognize the possible advantages of digital technology. This is essential to accurately evaluate the exhibitions and determine their value. To increase revenue, I think it's a good idea to incorporate digital offerings, as this will allow for more opportunities for lead generation and content marketing based on information about exhibitors and attendees. In my opinion, it will take at least two years before the business is operationally stable and has a proven track record of success, both of which will increase its value when it is time to sell.

Threat from ChatGPT

Concerns about ChatGPT on RELX, particularly in the Legal market, seem exaggerated to me. RELX stands out because of its in-depth knowledge of the industries it serves, as well as its customers' wants and needs, their processes, and the valuable products and services available to them. What ChatGPT can do, however, is provide some background information. In any case, RELX is in possession of unique and hard-to-replicate data and information. These databases are compiled over many years from a wide range of public records and private sources. The information provided by ChatGPT won't be complete unless it draws from all of these resources. One of RELX's biggest threats is competition that uses the same technology to create a "good-enough product" at a lower price and takes away some of the company's market share. Since RELX provides a vast array of products and services to its various industry verticals, I believe this is possible, but it will have minimal impact on the company's market position. It is common practice to bundle and integrate these, with the idea being that the greater value created by the collection of products increases the likelihood that customers will continue to use it. Also, RELX has extensive and deep customer relationships that it can cross-sell to, making those connections extremely hard to replicate or replicate successfully. Finally, general language models like ChatGPT do not provide reliable results that can be relied on by experts in the fields of research, medicine, and law.

Summary

In conclusion, RELX is a buy. I believe RELX accelerating growth has not been fully reflected in its stock price, and its valuation relative to US peers should close as the market recognizes this. Sale of Exhibition business should help with pushing valuation up, albeit not likely to happen until at least 2 years later. The threat from ChatGPT on RELX, particularly in the Legal market, seems exaggerated, and the company's unique and hard-to-replicate data and information, along with its extensive and deep customer relationships, give it a competitive advantage.

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