Andrea Beneventi the European Media Analyst of Exane BNP Paribas writes ….According to a company press release Andy Prozes, CEO of the LexisNexis division (40% of EBIT) is retiring from his role and from the boards of Reed with effect from 31st December.
The change is related to a long-awaited change in the reporting structure of that division, which encompasses two very different businesses: the low-growth US Legal (24% of group EBIT 11e) and the high-growth Risk (16% of Group EBIT 11e). A new CEO will be appointed for each new division: Jim Peck at Risk and Mike Walsh at Legal.
Our analysis: the change was not expected and highlights a couple of interesting aspects:
> The split of the Risk and Legal divisions may help a re-rating Reed shares.
Given the solid revenue growth (6% organic in 2010, 7% in 11e) and high margins (27% in 11e) of the Risk business, we believe this asset deserves a 12x EBIT multiple, close to the valuation of its listed peer Verisk.
> Growth and delivery are the mantra of Reed. Since the appointment of Erik Engstrom (former CEO of Elsevier) as Group CEO, we believe Reed’s mantra has changed from M&A ?(acquisition of Choicepoint, disposal of RBI?) to internal growth and delivery. Our view is confirmed by the appointment of two executive with a strong specialist background: an IT graduate at Risk and a lawyer at Legal.
Valuation
On 8.4x adj.EBITA 11 Reed is trading on a 4% discount to peers and a 7% discount to Media.
Conclusion
We believe Reed has the qualities and assets to succeed and the split of the LexisNexis division since the FY10 results can contribute to the re-rating of the stock. We reiterate our Outperform.
