UK Edition
Trying to predict the global economy’s growth prospects is a fool’s errand. Threats and opportunities that affect the world’s growth rate are impossible to accurately determine ahead of time.
As a result, this column generally focuses on analysing the strengths and weaknesses of businesses in what is often called a “bottom-up” approach to investing.
This contrasts with a “top-down” strategy that largely focuses on predicting which companies will perform well in a particular set of economic circumstances.
However, today’s uncertain outlook for the world economy cannot be ignored. And, in the case of one of this column’s previous tips, Informa, it does not appear to be factored into its share price.
The company, a global events and academic publication specialist, currently trades at an adjusted price-to-earnings ratio of 3:6. In Questor’s view, this fails to take into account several risks that could have a significant impact on its financial performance.
For example, the war in Ukraine is very likely to cause a reduction in the world’s economic growth rate relative to previous expectations.
It is adding to the problem of already rapidly rising prices – a problem that is likely to worsen further in the coming months.
High inflation has already prompted an increasingly hawkish monetary policy stance among central banks and rising interest rates having the potential to moderate global growth rates over the medium term.
Perhaps more importantly for Informa, Covid remains a threat to its growth prospects.
As highlighted in its recently released annual results, some countries in Asia and Latin America are further behind in their recovery from the disruptions of the pandemic.
When combined with continuing travel restrictions in some parts of the world, the near-term outlook for the company’s events business appears to be challenging.
Separately, the company is seeking to make wholesale changes to its business model during a period of continuing uncertainty.
It intends to focus on two areas in which it feels it has a competitive advantage: academic markets and business-to-business markets.
As part of its strategy shift, it is making major asset disposals and intends to return at least some capital to shareholders in the form of further share buybacks or special dividends, or both.
However, it could be argued that reducing its debts would be a more appropriate use of any money raised from asset disposals. Informa’s net debt may have fallen by 29pc last year so that it has a modest gearing ratio of 24pc.
But last year’s adjusted interest cover (the ratio of profits to interest payments) of five indicates that further reductions in leverage could be a prudent idea while its markets continue to experience a high level of uncertainty and interest rates are likely to move higher.
Clearly, there is scope for the company to build its subscription revenues and develop its online exposure.
These changes could increase its resilience amid an uncertain economic outlook and help it to adapt to a changing business environment.
Furthermore, it has made encouraging progress in reducing costs and raising capital since the start of the pandemic.
But it remains highly dependent on its events business.
Even if the events segment experiences upbeat trading conditions and the wider company delivers a growing bottom line, the stock’s price-to-earnings ratio does not leave much room for share price growth. In fact, it offers little if any margin of safety.
Since our original tip in December 2018, Informa’s share price has fallen by around 9pc. Somewhat surprisingly, it has bucked the wider stock market trend to post a 15pc rise so far this year.
While selling a stock at a loss is never a pleasant experience, the firm’s valuation does not appear to account for economic risks such as the war in Ukraine, rising inflation and Covid-related challenges in some of its markets.
Therefore, from a risk/reward perspective, the logical course of action is to capitalise on Informa’s recent share price outperformance by selling up and investing elsewhere. Sell.
Questor says: sell
Ticker: INF
Share price at close: 594p
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.
Read Questor’s rules of investment before you follow our tips.