Investors’ Chronicle: Relx, Barclays, Plus500

BUY: Relx (REL)

The data and analytics group has increased its operating profit by a fifth, writes Jemma Slingo.

Business-to-business data company Relx often flies under the radar. However, with a market cap of almost £50bn it is one of the FTSE 100’s big players — and one of the most consistent.

In the year to December 31 2022, revenue jumped by 18 per cent to £8.6bn, and 9 per cent of this growth was organic. This caused operating profit to surge by a fifth to £2.7bn. Management attributed the group’s success to its increasingly sophisticated analytics and decision-making tools. The company invested £400mn in new products and infrastructure in 2022, up from £309mn in 2021 and £333mn before the pandemic hit, in order to keep ahead of the curve.

This seems to be paying off. Relx has four key divisions — risk, science, legal and events — and all four grew their organic operating profits by at least 5 per cent. Fraud prevention analytics and decision tools proved particularly popular, as did legal data sets. The group said growth was fuelled by existing customers paying for more products, as well as a growing client base.

One of the joys of Relx’s business model is that a big proportion of its revenues are recurring, as clients subscribe to particular products. In 2022, the balance shifted slightly, with subscriptions growing more slowly than “transactional” sales. As a result, the proportion of money made from subscriptions has dipped slightly from 58 per cent to 54 per cent. However, visibility remains good for 2023, with scientific and legal growth expected to be above historical trends.

One thing to keep an eye on is Relx’s exhibitions business. The division took a massive hit during the pandemic and has still not fully recovered. Revenue is still 25 per cent below pre-Covid levels, while its adjusted operating margin sits at just 17 per cent, compared with 26 per cent in 2019. Impressively, the group’s adjusted operating margin is back in line with 2019, but it would be higher if events were out of the equation. Rivals Informa and Ascential have chosen to separate their events and data arms in recent months, and it will be interesting to see what approach Relx ultimately takes.

Big technology companies are not easy to find in the UK, and Relx doesn’t come cheap, with a forward price/earnings ratio of 22. However, we’re still drawn to the group’s huge archive of data and robust customer base. Plus, investors will be pleased to know that the group will be splashing out £800mn on share buybacks this year.

HOLD: Barclays (BARC)

Barclays’ hybrid banking model is again under scrutiny after a patchy performance, writes Julian Hofmann.

The market’s verdict on Barclays’ full-year results was swift and brutal after it became clear that the bank’s chronic inability to have all its operating divisions prospering at roughly the same time again held back its overall performance.

Barclays’ traders can be forgiven an uneven year as, despite ideal conditions for volatility trading, targets were missed as clients pulled funds. The problem was that investment banking fees did not increase to take up the slack. Therefore, it looks very much like the bank is trapped in its traditional dilemma of mediocre performance in one division holding back any improvement in another — a situation that chief executive Coimbatore Sundararajan Venkatakrishnan, known as Venkat, had vowed to change.

Barclays’ basic structural issues were obvious in how profitability progressed. After reaching £4.28bn in the second quarter, the bank’s fee income — which is heavily dependent on trading and investment banking — had fallen to £3.06bn by the year end.

In fact, fees generated by investment banking on its own were just £480mn for the final quarter. By contrast, the UK domestic banking business enjoyed a champagne performance as rising rates helped to lift the bank’s net interest margin by 48 basis points to 3.1 per cent between the beginning and the end of the reporting period.

However, the bank did see some compression in its net interest margin, which is why the outlook for 2023 was held at 3.2 per cent, instead of the 3.28 per cent that consensus had forecast. This may be related to it not swapping out some of its fixed-rate assets to floating rate quickly enough, thereby depressing the overall margin for the year.

Barclays will at least benefit from costs staying down in relation to total income — the cost ratio in Barclays UK, for instance, was significantly better at 60 per cent (2021: 68 per cent). Management also claims to see a return on tangible equity of 10 per cent for this year.

Overall, it was a year to forget for Barclays investors; the final legal bill for its various mishaps, including the overissuance of securities in the US, comes to £1.9bn, for instance. In the meantime, Barclays’ £500mn buyback looks stingy when compared with rising payouts at its European competitors. Overall, the forward consensus of just six times 2023 EPS forecasts looks well-earned.

HOLD: Plus500 (PLUS)

Plus500’s positive, if topsy-turvy results, reflect the volatility of last year’s market, writes Julian Hofmann.

Contract-for-difference platform Plus500 saw the benefit of traders betting on the ups and downs of the markets as 2022 came to a particularly volatile end.

The company’s core offering is straightforward; it offers the CFD trading that hardcore traders use to bet on falling or rising prices. The key to its future success is whether it can continue its purpose as a vast exercise in capital allocation — another $270mn in dividends, special dividends and share buybacks were announced in these results.

However, while revenues and profits were higher, the gross dividend was actually lower than last year and there was the sense that the company is starting to think seriously about its future operations.

A starting point for this is the amount that Plus500 spends on its intellectual property. Notably, management has decided to allocate $50mn to its research and development capability, including technology for improving engagement and retention among its majority-dormant customer base.

Active customer numbers for 2022 almost halved compared with 2021 to 281,000 — although, in fairness, the comparatives are difficult when one year was truly exceptional for trading companies; customer income fell from $703mn in 2021 to $640mn in 2022. Management’s other approach is to open new operations in high-value markets to attract spread betters for longer terms.

Plus500 struggles to break out from its lowly valuation of eight times consensus earnings for 2023, and analysts have been chipping away at forecasts over the past few weeks.