With Informa’s bid for UBM likely to be approved by both sets of shareholders, there is no longer much risk to holding the latter.
Taking on inherent risks
The price target has been whacked up from 675p to 930p, which is roughly the level of the offer terms, with Berenberg stating that the bid from Informa PLC (LON:INF) means the publishing group is taking on the risks inherent in the UBM business, especially the reliance on the fashion sector.
“In the short-term, Informa will likely have to address increasing headwinds in the fashion segment (c20% of UBM’s FY17 Events revenue). In the absence of new launches in Japan, this fell by 6.9%, and the trend is expected to be similar in FY18 – we think there is a risk that Informa will have to cut prices here as it addresses the pressures on the target attendee base of physical fashion retailers,” Berenberg declared.
On the margin front, the recent upward trajectory may not be easy to continue or even maintain, Berenberg believes, and notes that UBM’s management flagged the 2017 benefit from FX tailwinds and shifting the cost to biennial events, both of which reverse in 2018.
How sustainable is the top-line growth
Although Informa is paying a big premium for UBM, in Berenberg’s view, the combined group will have some “scarcity value”.
“The enlarged company will have market cap of near £9bn and deliver 4% organic growth, yet trades at just 13x 2019 earnings. This combination has significant scarcity value, being a c20% discount to RELX still despite its own de-rating, and we think there is substantial scope for a re-rating,” Berenberg said, as it reiterated its ‘buy’ rating on Informa.
The price target moves from 825p to 800p, largely reflecting recent currency fluctuations and higher depreciation levels.
For the combined entity, the key question is how sustainable is the top-line growth.
“In the short-term, the recent trade body survey showed growth expectations around the world improving into H2 2018. Fundamentally, greater scale and use of technology is unlikely to drive upside to forecasts – otherwise it would likely have been seen already at RELX – but it should contribute to greater resilience of growth as customer lists & operational best practice are shared,” Berenberg said.
Shares in Informa rose 0.8% to 716.4p on Thursday morning.