After H1 +4% constant currency trading profit, an unchanged H2 outturn was predictable in view of more difficult comparatives and still testing conditions. Indeed the 7% weakening in Travel Management constant currency revenue (down 4% in H1) was in line with our forecast as heightened client churn and Brexit-related uncertainty added to longstanding aggressive competitor pricing and the move to online self-booking by clients. However, the 6% decrease in constant currency trading profit was slightly more than we expected but more than made up by an excellent performance (like-for-like +72%) by Fraedom as its H1 investment started to pay off. Net debt reduced by £10m in H2 to £21m (down 38% on March 2016). 

HRG’s long-awaited review has elicited a formal growth strategy, based on groupwide investment in staff and technology. Incremental opex is projected at £25m over three years. The targeted benefit is “significant,” ie Travel Management revenue CAGR of at least 2% at medium-term margin of more than 15% (FY17 13.6%), while Fraedom is to grow by c 20% CAGR. The current year is one of “transition” as likely £6m initial costs are absorbed and our PBT forecast is duly revised. Continuing strong cash generation should ensure minimal rise in net debt. 

Growth comes at a price, so the immediate earnings setback should not alarm. Rather, HRG should be rewarded for shedding a reliance on cost savings for profit improvement, while financial flexibility and hard-won efficiencies leave it well-placed to take advantage of investment opportunities (such as the planned purchase of digital travel innovator eWings.com) and to continue to grow dividends. There was a welcome reduction in the pension deficit in H2 (stable year-on-year despite a lower discount rate).