TRI - Thomson Reuters: Financial Powerhouse

2023-07-25 03:24:29 ET

Summary

• Thomson Reuters Corporation provides business information services worldwide.
• TRI's business model is highly attractive, with recurring revenue and strong fundamental demand for data services.
• We believe there are steady industry tailwinds, as the demand for its services increases in line with technological development.
• The Company's margins are equally attractive with scope for improvement through cost savings.

Investment thesis

Our current investment thesis is Thomson Reuters Corporation ( TRI ) ("TR") is highly attractive from a financial perspective. Underlying revenue growth is strong due to low churn and active pricing. The nature of TR's service allows the business to benefit from a low marginal cost, contributing to a strong EBITDA-M (c.30%). We are bullish on the development of demand in the coming years due to industry tailwinds and product development.

Company description

Thomson Reuters Corporation provides business information services worldwide, operating in five segments: Legal Professionals, Corporates, Tax & Accounting Professionals, Reuters News, and Global Print.

Share price

TR has generated impressive returns across the last decade, with over 300% gains. This is a reflection of consistent financial improvement across the historical period and an attractive profile.

Financial analysis

Presented above is TR's financial performance for the last decade.

Revenue

Revenue has grown at a CAGR of 5% across the historical period, reflecting impressive financial development despite the maturity of the industry.

TR's business model is built on the strength of its brand, which is recognized globally and supported by the British Reuters news outlet. The company's strategy is to continue to invest in its technology and platforms to ensure that it remains a leader in its industry. This comes as the business disposed of Refinitiv to LSEG ( OTCPK:LDNXF ) and has recently disclosed the sale of the LSEG shares it received as part of the transaction.

In recent years, we have seen a shift toward digitalization in the financial, legal, and tax industries, which is driving demand for digital solutions. This comes as society as a whole continues to incorporate technology into every facet of life. This allows businesses to improve efficiency and ability to analyze and action findings from information, contributing to financial improvement.

With this increased technological incorporation, data has become king. Businesses are increasingly in need of data-driven insights as a means of making informed decisions. This has contributed to increased demand for high-quality data and advanced analytics capabilities.

AI will likely be the key memory from 2023 when people look back. Many businesses are developing their AI capabilities and TR is one of them. TR is investing c.$100m in generative AI technologies, seeking to modernize its current product suite to incorporate AI insight. The business is positioned perfectly for this as data and analytics are perfectly positioned to benefit from real-time, bespoke analysis.

It is worth considering the overarching target market of TR. TR provides services to the Legal sector, as well as Tax & Accounting. What we must understand about these industries is that they are fundamentally intertwined in society. They are not going away, they are not cyclical, and they will grow in line with the population at a minimum. This is highly beneficial as it reduces volatility in earnings. As a leading player in the market, TR is positioned perfectly to enjoy this.

The financial industry is subject to a wide range of regulations, which are becoming increasingly complex due in part to the development of technology within said industries, as well as businesses being subject to a greater number of International requirements due to Globalisation. Importantly, the cost of non-compliance is increasing as Governments increase punishments. TR has seen healthy growth in its Regulatory Intelligence segment. We see scope for further development in the "RegTech" space, which is the incorporation of technological capabilities to enhance insight from clients. Many are investing in this segment, such as LSEG and Bloomberg.

TR is facing increased new entrants due to the shifting trends in the data industry representing scope for opportunities through disruption. The perfect example of this is the entry of LSEG into the data industry via Refinitiv. It is very unlikely that LSEG will stop there.

Case study

TR provides a suite of products that are a staple across many industries. The company has low churn due to the deep integration of its products into various workflows, creating what is a fundamentally important service to society. This does create the risk that TR does not innovate as a means of maximizing returns. Historically, this has contributed to increased competition and in many cases, material disruption.

Westlaw is one of TR's premier products within its Legal segment. TR has invested heavily in the development of this to increase the value to its users, which in this case is time and insight provided. The most recent iteration of this (Westlaw Precision) is estimated to be twice as fast and significantly more insightful.

This is one of the products that TR is looking to incorporate AI into as a means of improving it further. The integration potential is high.

Margin

TR's margins have improved across the historical period, with EBITDA-M increasing 6ppts since FY16. This said, NIM has been surprisingly volatile, reflecting substantial non-trading charges.

Management is forecasting further Opex savings, which has the potential to generate additional margin improvement.

Q4 results

Presented above is TR's most recent quarterly results.

Organic growth remains strong, reflecting the resilience of the company's business model in the face of current global conditions. This illustrates the recurring, low-churn nature of the company's earning potential.

Balance sheet

TR is conservatively financed, with a ND/EBITDA ratio of 1.3x. This gives the business scope for raising debt if the business seeks to invest further in growth.

Further, the business is heavily distributing to shareholders. TR is both buying back shares and paying dividends. This is driven in part due to the sale of assets and other one-off factors, which will likely mean distributions decline in the coming years.

Outlook

Presented above is Wall Street's consensus view on the coming 5 years.

Revenue is forecast to grow at a CAGR of 5%, which looks reasonable based on the organic growth we have seen so far. With recurring revenue, TR is able to implement consistent price increases which will support growth.

Margin improvement is also forecast, driven by continued incremental cost savings and scale benefits.

Valuation

TR is currently trading at 23x NTM EBITDA and 38x NTM earnings. This is a premium compared to its 10Y historical average.

The premium looks justified, as TR increases scale through upselling customers and winning new clients. The data industry continues to develop in importance, contributing to higher value placed on TR's services and thus growth potential. Further, Management is seeking internal efficiencies as a means of improving margins. Underpinning this is product development which will defend the company's competitive position.

Our only concern is how markets react to a reduction in distributions once these one-off transactions end.

Final thoughts

TR is a high-quality business. Revenue is recurring in nature and thus far, has supported margin improvement and healthy underlying growth. The data industry is highly attractive and is seemingly facing tailwinds as demand improves.

TR's valuation looks appropriate given the financial superiority of the business but it is difficult to see scope for upside at its current price.

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