London-based investment analysts have reacted favorably to the improved interim financial results Hogg Robinson Group announced on Tuesday. Edison Investment Research raised its pre-tax profit forecast for the travel management company by 10 percent to £31 million (US$48.2 million) for the year ending in March 2011, while Collins Stewart raised its forecast for the next three years by 4 percent to 6 percent and retained its "buy" recommendation. HRG's share price on Wednesday stood at 35 pence (US$0.54), but Collins Stewart has set a price target of 50 pence (US$0.78).
The analysts' notes provided a rare insight into how the financial world views corporate travel because HRG is the only major publicly listed stand-alone TMC, although American Express provides some disclosure of its travel services performance as part of its total financial reporting.
HRG announced a 73 percent rise in underlying profit to £19.5 million (US$30.3 million), thanks largely to organic sales growth of 5.8 percent, while costs increased by only 1 percent. In a note to investors, Collins Stewart said the profit and a dividend of 0.5 pence per share were "well ahead of expectations." Collins Stewart is assuming growth in the second half of HRG's financial year will be solid but less spectacular than it was in the first half, owing to an anticipated slowing in sales growth and higher costs as the company enlarges its workforce.
Optimism Beyond HRG
Nevertheless, Collins Stewart expects both the corporate travel market and HRG to perform well during the next few months. "Client travel spend, air transactions and HRG's revenues ... all remain 10 percent to 15 percent below their levels in 1H08, with clear scope to recover," the note said. "Only [about 50 percent] of travel management has been outsourced, a figure we expect to increase over the medium-term ... The valuation fails to reflect the resilience of the business model, the medium-term growth potential (increase in corporate travel, more outsourcing of travel management), the significant technology or cash generation."
In its note to investors, Edison wrote: "While investment in growth is set to curb H2 profit, increasingly favourable market conditions should still underpin full-year returns ahead of expectations. Successful re-negotiation of long-term bank facilities is a welcome complement to continued effective cash management (reduced seasonal H1 outflow), as is the resumption of dividend growth."
Some Clouds Emerge
The analysts did note a couple of clouds on HRG's horizon. In common with many businesses, the cost of credit has risen for HRG, and Edison noted: "Despite an estimated further £10 million in net debt, finance costs risk being much higher after the recent refinancing at less attractive rates."
Collins Stewart spotted a drop in sales and profitability at expense management arm Spendvision, which is 58 percent owned by HRG. "Both relate to the roll-out of the Visa contract," explained Collins Stewart. "Spendvision has been investing in the contract, but the take-up of the services by Visa-issuing financial institutions has been slower than hoped."