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26 February 2013 | Education | Wilmington Group plc

Wilmington’s Profits up 15% at Interims

​Wilmington Group plc, the provider of Information, Compliance and Education to professional markets has announced its interim results for the six months ended 31 December 2012.

Graph sourced: stockopedia.co.uk
Graph sourced: stockopedia.co.uk

Group revenues for the period were down slightly by 1.7% at £40.9m (2011: £41.6m) reflecting the disposal of businesses since last year, continued rationalisation of underperforming businesses, its exit from contract directory publishing and currency translation.

The Company continues to increase the proportion of recurring subscription based revenues; now 39% of total revenue (2011: 37%). Subscription and information sales now represent 59% of revenue. It continues to transition the business to better quality, higher margin business.

In a sector under threat from disruptive technology the Company’s legacy print business represents just 2% of the total, significantly mitigating downside risk. Further the Company has further reduced its exposure to low quality advertising revenues which now represent just 4% of total sales. 

 On 7 February 2013 the Company acquired NHiS further strengthens its position in the healthcare market.

Mark Asplin, Chairman, commented: 

"It has been a solid first six months' performance with strong growth in many key markets offset by the planned disposal and rationalisation of loss making and non-core activities. The new management structures have bedded down well and the emphasis has been on margin improvement, efficiency reviews and firm action to remove underperforming activities. 

"We have seen good overall growth in profits and operating margins as we continue to develop our portfolio to meet our clients' changing information, compliance and education needs. This together with reduced interest costs has resulted in a 15% increase in Adjusted Profit before Tax and a 23% increase in Adjusted Earnings Per Share. In particular, our Banking & Compliance and Pensions & Insurance divisions have both delivered strong profit and revenue growth. 

"Our outlook for the full year remains unchanged. Whilst the broader economic conditions remain challenging, most of our market sectors have been resilient. The Group actively manages its cost base and the reorganisations announced last year have benefitted the Group. We expect to benefit further from the resultant cost savings over the next few months and are actively pursuing further efficiency gains across our businesses. Our acquisition of NHiS, completed on 7 February 2013, is an example of our emphasis on investing in quality, high margin, growth businesses within our key markets." 

Business Strategy 

Wilmington's strategy is to increase shareholder value by delivering sustainable and growing profits from servicing the information, compliance and education requirements of professional business markets. 

Its investment strategy is focused on developing existing and acquiring new businesses with high repeat revenues and strong, cash generative income streams both in the UK and overseas. The result of implementing this strategy will be a business with an increasing proportion of revenues derived from subscriptions to products which disseminate content-rich, high-value information digitally. Tighter regulatory control and more complex legislation in our key markets will continue to drive the demand for our products and services, both in the UK and abroad. 

Operational Review 

Pensions & Insurance (16% of Group revenue- up 8% in 2012, Group Contribution up 17%) 

This division, which includes Axco, Pendragon and ICP, provides in depth regulatory and compliance information, market intelligence, analysis and workflow tools for the international insurance market and the UK pensions industry. 

Axco, which has benefitted from significant investment since joining the Group, reported 13% revenue growth helped by the launch of new digital subscription products and analytics services. Sales were also boosted by increasing demand from emerging markets. Pendragon maintained its market leading position in the UK pensions market and recorded growth of 2%. ICP has seen an increase in demand for credit reports, particularly in the Middle East, and recorded growth of 5%. 

Banking & Compliance (21% of Group revenue – up 9% in 2012, Group Contribution up 25%) 

The Banking & Compliance division provides corporate finance and capital markets training and accredited programmes in compliance, anti-money laundering, financial crime and trust management. This division serves primarily tier 1 banks, the international financial services industry and major multinational companies. 

Growth drivers included the provision of compliance and anti-money laundering programmes to international banks and major multinational companies in the oil industry and on-line retailing. 

Healthcare (15% of Group revenue – down 8%, Group Contribution up 9%) 

This division includes Agence de Presse Médicale, its French language medical news agency, OnMedica, its digital healthcare marketing business, and Binley's, its UK healthcare information business. 

Business Intelligence (13% of Group revenue – down 4%, Group Contribution down 28%) 

This division includes Wilmington’s Data Suppression and Fraud Prevention services as well as its Charities, Fund Management and Film & TV services. The division is undergoing the most significant transformation of all its businesses, as it transitions from print based information to digital services, subscription information products and workflow tools. Digital services now represent 68% of divisional revenues. 

Accountancy (12% of Group revenue – down 4%, Group Contribution up 10%) 

The Accountancy division is the leading provider of training, technical support and marketing services to accountancy firms in the UK. 

The first half of the year saw further reduction of marginal Quorum branded training courses together with a further decline in printed materials offset by growth in digital replacement products. 

Legal (23% of Group revenue – down 9%, Group Contribution up 61%) 

The Legal division provides a range of training, professional support services and information including Continuing Legal Education (CLE), expert witness training, databases and magazines. It saw revenue reduce by 9% in part due to the disposal of its company formations business in June 2012. 

Acquisitions - NHiS 

On 7 February 2013 Wilmington acquired NHiS, a leading provider of business intelligence, data analysis, workflow tools and other services to pharmaceutical companies in the UK for £5.6m. Around 40% of its revenue is derived from subscriptions and the business has enjoyed high overall renewal rates as defined by customer spend in excess of 90%. Over 75% of NHiS revenue is delivered digitally. 

The acquisition of NHiS is consistent with Wilmington's strategy of acquiring businesses with high repeat revenues and strong, cash generative income streams in the Group's key markets.

Financial Summary

Notes

(1) Adjusted operating profit is stated before non-recurring costs of £1.04m (2011: £1.0m), share based payment of £0.35m (2011: £0.35m), amortisation of publishing rights and benefits £2.8m (2011: £2.8m), gains on disposal of £3.3m (2011: nil) and other £.048m (2011: £0.14m).

(2) Adjusted Free cash flow is adjusted operating cash flow after interest and cash tax. 

(3) Adjusted operating cash flow has been significantly reduced in 2011 and 2012 due to a reduction in payables at the end of December in each period by in excess of £3m p.a. Within this category, subscriptions and deferred Income were down £1.7m compared to 30 June 2012. £0.6m relates to foreign exchange differences and the exit from the contract publishing business and £0.7m relates to reductions associated with reduced numbers of events. The remaining shortfall was temporarily affected by timing on some Axco subscription renewals. By the end of January 2013 the contract renewals were complete and Axco deferred revenue was up over 10% on the same period in 2012.

Outlook 

Wilmington’s outlook for the full year remains unchanged. The Company believes that whilst economic conditions remain challenging, most areas of its business have been resilient and its internationally focused divisions are generating good growth. This growth, alongside cost savings and management changes which have already been implemented, should result in an outcome for the full year in line with its expectations. 

Comment:

Commentary 

Wilmington’s excellent financial results are somewhat masked by arcane accounting rules which require that part of the effective goodwill arising on an acquisition (i.e. the difference between the purchase price and net asset value)  be treated as the purchase of intangible assets which in the Company case means publishing rights, titles and benefits. The problem is that unlike goodwill these intangible must be amortised through the profit and loss account over their deemed useful life (in Wilmington’s case around ten years). This accounting treatment makes it increasingly difficult to assess the true underlying performance of a business and gives rise to a raft of alternative profit measures which differ from one company to the next.  In the year ended June 30, 2012, Wilmington’s adjusted EPS was almost double its basic EPS in large part because of the amortisation of intangibles arising on acquisition.

The most common profit measures used are adjusted operating profit and EBITDA (earnings before interest, tax, depreciation and amortisation). As all businesses need to renew their assets at some point in time we fail to see the relevance of EBITDA in a public company setting and must therefore assume management teams like the metric because it produces a higher profit number than the alternatives.

To its credit Wilmington chooses EBITA (earnings before interest, tax and amortisation) as its chosen   measure of profit and from this year has gone a step further by splitting out its amortisation charge into new component parts. The first is amortisation of intangibles arising on acquisition which arguably has more in common with goodwill and the second is amortisation of software development which had previously been capitalised. Too many listed IT and software companies try to hoodwink investors by asking them to ignore a very important cost in the business, namely the cost of software development. 

       

Following yesterday’s announcement by Pearson that it plans to spend £200m accelerating the digitisation of its business it will be of huge reassurance to Wilmington’s shareholders that the Company has largely made this journey, with its legacy print business making up just 2% of sales.

With adjusted operating margins of 17.4%, adjusted returns on total assets (excluding goodwill and “goodwill like” intangibles) of 45.3% and a growing subscription business, Wilmington is a quality franchise and should be able to generate significant free cash flow overtime.  It will be of some concern to investors that cash generation has been poor in the last six months due to adverse movements in working capital as discussed in note 3 above, but this should reverse by the year end. 

Another worry will be restructuring costs which are ignored in the adjusted profits number and are described as non-recurring but which appear to occur with uncommon frequency. Investors will be hoping these charges will reduce as the business completes the transition from print to digital.

Trading on a forward earnings multiple of 13.0 and yielding 4.4% (based on a share price of £1.56 on 26/02/2013) the shares are not expensive for a business able to generate superior returns on capital employed in the business. 

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