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Fitch Affirms RELX at 'BBB+'; Outlook Stable
May 5, 2017 / 4:22 PM / 5 months ago

Fitch Affirms RELX at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 05 (Fitch) Fitch Ratings has affirmed UK- and Netherlands-based media groups RELX PLC's and RELX NV's (together, RELX) Long-Term Issuer Default Ratings (IDR) and senior unsecured rating at 'BBB+'. The Outlook is Stable. A full list of rating actions is available below. RELX has a high quality portfolio of scaled businesses that are well diversified from a geographic and product perspective. The company has a leading market position within each of its sub-sectors that translates into robust operating margins and cash generation. A significant proportion of revenues are from recurring, transactional and subscription-based products and services. These revenues drive stability and visibility to cash flows and underpin the company's credit profile and rating. RELX maintains significant discretion in managing its capital structure and deploys a predominantly organic expansion growth strategy that reduces the risk on use of free cash flows (FCF). KEY RATING DRIVERS Stable and Visible Cash Generation: RELX has a strong portfolio of businesses spanning journal publishing, risk and business analytics, legal applications and exhibitions. In 2016 52%, of revenues were based on subscription services and 46% on transactional services. RELX's subscription-based revenues are recurring in nature and primarily generated from its Scientific, Technical and Medical (STM) and Legal divisions. The products and services provided by these divisions are well established and entrenched within the workflow of the customers they service, which raises entry barriers and enables the generation of stable cash flows with good visibility. Organic Growth Strategy: RELX has grown underlying revenues by 3% to 4% for the past five years, which we believe will continue over the short to medium term, driven primarily by Risk & Business Analytics (R&BA) and STM divisions. A significant proportion of this growth has come from developing its core products and services, and leveraging them in new geographical markets. The success of the strategy reflects tailwinds in RELX's industry sub-sectors and the company's core capability in leveraging technological platforms and data analytics to add value to its customers and sustain its competitive position. Tailwinds Match Execution at R&BA: Underlying revenues and adjusted operating profits at RELX's R&BA division grew 9% yoy in 2016. We believe that growth is likely to continue by mid- to high-single digits over the next two to three years due to growing demand and opportunities for using data, analytics and technology to aid business decisions and transactions. Most of the revenue is transactional in nature with a diverse end customer mix that spans a number of segments. Visibility on underlying KPI's and the sensitivity of the revenue streams to cyclicality if any is low, partially masked by strong growth and service penetration potential. Reduced Dependency on M&A: RELX's average spend on net acquisitions over the past four years has been around GBP300 million or about 23% average of pre-dividend FCF for the same period. The success of RELX's organic expansion strategy and advanced transition to electronic distribution formats is reducing the company's dependence on M&A to reshape its portfolio due to technology-driven operating risks. Therefore, the company is able to focus its spend on smaller investments that enhance the company's core operations. We believe this reduces the risk relating to the use of FCF and indicates strong industry execution skill competencies. The amount of acquisition investment spend is slightly higher than its principal peer Thomson Reuters (19%, BBB+/Stable), but significantly lower than media sector peers such as WPP (43%, BBB+/Stable) and Bertelsmann (161% 2012-14, BBB+/Stable), both of which continue to have significant technology-driven change affecting their core businesses. DMGT (BBB-/Stable) has been a net disposer of assets. Capital Structure Discretion: RELX has one of the strongest pre-dividend FCF margins in the sector, which we believe will remain broadly stable at 19% to 20% in the next two to three years. The stability will enable cash flows to grow broadly in line with revenue. Historically, the company's shareholder dividends have utilised around 50% of pre-dividend FCF, leaving the company with significant discretion and flexibility to manage its capital structure. RELX's funds from operations (FFO) adjusted net leverage at end-2016 of 2.7x is likely to increase slightly to 2.9x over the next two years, but should remain comfortably within its current rating. Open Access Risk Remote: Open access is a risk that could potentially affect the STM division. The risks relate to a change in pricing structure and platforms for the publishing of journal articles, which could provide free access to journals; currently, RELX operates a predominantly subscription-based payment model. While the trends in open access are likely to grow, we believe they are unlikely to take significant market share in the medium term. RELX's deployment of 'author pays' pricing mechanisms, combined with the overall value proposition of its platform, is likely to enable STM to continue to grow revenues and maintain stable margins. DERIVATION SUMMARY RELX is strongly positioned at 'BBB+'. This reflects the company's strong operating profile, diversified scale and discretionary capability in managing its capital structure. A combination of sizeable recurring revenue streams with minimal exposure to print and advertising provides stability and visibility to cash flows. This is reflected in relatively higher levels of leverage that RELX can sustain at the 'BBB+' level. A similarly rated peer, Thomson Reuters Corporation (BBB+/Stable), has equally strong diversification and a higher proportion of subscription-based revenues, but potentially greater cyclical exposure due to the mix of revenues from financial services. Lower rated peers such as DMGT (BBB-/Stable), or those with tighter leverage metrics for the same rating level, such as Bertelsmann (BBB+/Stable), have lower recurring revenues, greater adverse impact from technology changes and/or greater exposure to print and advertising revenues. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth of 7% in 2017 driven by FX tailwinds and organic growth; growth of 2%-3% per annum thereafter - EBITDA margin of around 35% between 2017 and 2020 - CAPEX to sales of around 5% between 2017 and 2020 - M&A spend of GBP400 million to 450 million per annum - Dividend growth and ongoing share buybacks to maintain leverage around 2.0x unadjusted Net Debt/EBITDA - No disruptive impact on or change to the STM journals unit from the evolution of open access subscription models. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - A more conservative stance towards financial leverage and shareholder remuneration -Expectations that FFO Adjusted net leverage would trend to below 2.5x on a sustained basis. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Expectations that FFO adjusted net leverage would exceed 3.3x over a sustained period. -A marked deterioration in RELX's operating environment. LIQUIDITY RELX has strong liquidity with cash and cash equivalents of GBP162 million at FYE16. An undrawn USD2 billion credit facility, available to July 2020, is used to backstop GBP521 million of commercial paper and short-term loans. Fitch expects RELX to remain FCF positive across the rating horizon. FULL LIST OF RATING ACTIONS RELX PLC and RELX NV --Long-Term IDR: affirmed 'BBB+'; Outlook Stable --Short-Term IDR: affirmed at 'F2' RELX Finance BV --Senior unsecured notes: affirmed 'BBB+' --Senior unsecured notes issued by Aquarius + Investments PLC and ELM BV: affirmed 'BBB+' --Commercial paper: affirmed at 'F2' RELX Capital Inc. --Senior unsecured notes: affirmed 'BBB+' RELX Inc. --Senior unsecured notes: affirmed 'BBB+' --Commercial paper: affirmed at 'F2' RELX Intellectual Properties SA --Commercial paper: affirmed at 'F2' RELX (Investments) plc. --Senior unsecured notes: affirmed 'BBB+' --Commercial paper: affirmed at 'F2' Elsevier Finance SA --Senior unsecured notes: affirmed 'BBB+' --Commercial paper: affirmed at 'F2' Contact: Principal Analyst James Hollamby Associate Director +44 20 3530 1656 Supervisory Analyst Tajesh Tailor Senior Director +44 20 3530 1726 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Damien Chew, CFA Senior Director +44 20 3530 1424 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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