Hogg Robinson’s (HRG’s) development of software-as-a-service (Fraedom) is paying off impressively with “excellent” performance in the year to March. A near-doubling in technology trading profit more than made up for relative softness in travel management and looks set to continue to drive HRG’s growth in addition to likely increasing benefits from corporate restructuring. Bumper cash generation (FY16 net debt/EBITDA of just 0.6x) offers ample scope for profitable investment and returns to shareholders.
After H1 +10% constant currency trading profit, boosted by recovery, a broadly unchanged outturn in H2 should not disappoint, given a more demanding comparative and persistent market pressures. Indeed, travel management’s profit shortfall was just 7% on 4% lower revenue thanks to initial efficiency measures (£4m cost saving in the full year). However, this was offset by a step-change in Fraedom profit (up threefold), driven by 15% higher revenue, largely from banking clients. Cash generation was again strong despite subdued trading (net debt down c 40% in the half, including a c £9m one-off pension receipt), while there was a slight decline in the underlying pension deficit owing to a rise in discount rate.
While our current-year PBT forecast is almost unchanged (previously £35m), the revised mix reflects the trading pattern of H216. It now assumes greater revenue caution in travel management (-1% in constant currency), accompanied by lower margin pickup (13.5% against 13.3% last year but still below 14.4% in FY14). Our margin assumption reflects effective cost control in FY16 and guidance of £8m further savings from reorganisation. The new business pipeline is healthy, as is the scope to expand relationships with existing clients. Key growth initiatives, such as new service offerings (eg meetings, groups and events) and new markets (eg energy and marine and government) are performing well.
Although HRG looks to be delivering on key initiatives, its fresh admission that travel management, its principal activity, will remain under pressure highlights the challenge it faces adjusting to a changing market. While this is being resolved, investor caution is reasonable. However, its FY17 P/E rating is low (under 10x) compared with that of the FTAS UK Support Services sector (c 14x) and the company is securely funded, highly cash-generative and committed to a progressive dividend (+8% in FY16).