IMS confirmation of Q1 trading resilience is backed up by reassurance that Hogg Robinson (HRG) is in good shape to weather potential Brexit uncertainty. Strong finances, a fast-developing Fraedom technology business and increasing benefits from corporate restructuring should mitigate market pressures, while in a downturn HRG has been seen to benefit from a corporate desire to use professionals to cut travel costs. We reiterate that low net debt (FY17e net debt/EBITDA of just 0.5x) allows for profitable investment and returns to shareholders.
HRG is on course to meet market expectations for the current year after an opening quarter to June much in the vein of H216, ie relatively subdued travel management (revenue -3% in constant currency) offset by Fraedom’s buoyancy. While our fullyear PBT forecast is unchanged, it now assumes greater caution in travel management, given a broadly similar outlook, compounded by possible Brexit softening, of which there are very early signs. We look now for divisional revenue to continue to decline at that rate but at maintained margin, thanks to effective cost control in FY16 and guidance of £8m further savings from reorganisation. Favourable currency movements should make good the consequent profit shortfall. We remain confident that Fraedom will deliver c 20% trading profit growth.
Our newly introduced forecasts for FY18 closely reflect the aforementioned trading pattern, albeit without the significant currency benefit in FY17e. We believe that the joker in the pack is HRG’s enhanced financial flexibility (we forecast net debt at end March 2018 of merely 0.3x EBITDA), which would allow a material expansion of the technology offering, already the driver of HRG’s growth.
Continuing evidence that travel management, HRG’s principal activity, remains under pressure highlights the challenge it faces adjusting to a changing market. While this is being resolved, investor caution is reasonable. However, the FY17e P/E rating is low (under 9x) compared with that of the FTAS UK Support Services sector (c 14x) and the company is only modestly indebted, highly cash-generative and committed to a progressive dividend (+8% y-o-y and 2.9x income cover in FY16).