A 10% rise in half-year trading profit backs up clear H215 recovery. Hogg Robinson (HRG) is delivering positive signs of meeting key objectives, ie reduced cost base (annualised savings of £7m) and net debt (-5% y-o-y), as well as growth in its managed travel business. Meanwhile, its enhanced technology offering, boosted by the new Fraedom brand, is being well received. However, the current uncertain environment of the travel industry suggests caution. We are slightly shading our expectations of profit for this year and next but, importantly, not of the dividend, which remains securely covered (FY16e 2.8x) and financed.
After unexpected turbulence in H115, a 10% constant currency trading profit gain on revenue down 1% is welcome evidence of the renewed robustness of the company’s fee-based model and effective cost control (revenue per employee up 4%). While partly a function of the trend to online self-booking by clients (from 46% to 49% in the period), revenue softness reflected testing conditions, notably in Australia and Norway, as well as persistent aggressive competitor pricing. Encouragingly, H1 saw good new business wins and expansion of relationships with existing clients, as well as a continued high retention rate and healthy pipeline. Cash generation was again strong; reported 5% y-o-y reduction in net debt to £56m was curbed by timing issues, eg short-term negative working capital and a pension holiday in the comparative half.
Despite H1 progress, continuing pressures prompt us to lower profit forecasts, albeit modestly (by under 5%). Our caution centres on North America and Asia, where trading returns may lag those of last year. However, there is now greater optimism about Europe after a pleasing first half (underlying trading profit +8%) and Fraedom (previously Spendvision), which we expect to increase profit by c 40%, albeit from a low base (8% of FY15 group profit). Our maintained forecast of £39m net debt at March 2017 fits the company’s target range of 0.7-1.0x LTM EBITDA.
While by its own admission HRG is still seeking “to get ahead of the curve” in a changing market, investor caution is justifiable. However, signs are positive and its FY16e P/E rating is low compared with that of the FTAS UK Support Services sector (c 16x). HRG is well funded (substantially to 2018), highly cash-generative and committed to a progressive dividend policy (interim +8%).