Morning Note: Market news and a resilient update from Experian.

Market News

In both the US and the UK inflation readings have come in below market expectations spurring gains in both equity and bond markets. Yesterday, US CPI came in at 3.2% in October, below the 3.3% expected and a sharp drop from the prior reading of 3.7%. The Core reading, excluding food and energy came in at 4%. The move in the fixed income markets was explosive with the 10-year Treasury rate falling 18bp to 4.45%, while the 2-year rate, which is more sensitive to short-term policy rates was down 21bp to 4.83% as the market becomes increasingly convinced the Fed is done hiking rates. The dollar fell, while gold rose to $1,970 an ounce.

In the UK this morning, inflation rose 4.6% from the previous year, down sharply from the 6.7% rate reported in September, the biggest fall in over 30 years. Both the core and services inflation came in below expectations. The news caused rate traders to increase bets that the Bank of England will be able to cut rates as early as spring next year. The market still doesn’t expect the inflation rate to hit the 2% target until 2025, however the gloomy outlook for growth could force the Bank’s hand before the target is met.

US equity markets bounced last night – S&P 500 (+1.9%); Nasdaq (2.4%) – with the Russel 2000, an index of US small-cap stocks, rising by 5%. This morning in Asia, markets were also firm: Nikkei 225 (2.5%); Hang Seng (3.7%); Shanghai Composite (0.6%). The FTSE 100 is currently trading 0.9% higher at 7,506, while the pound slipped to $1.2470 and €1.1470. Oil trades at $82.50 a barrel, while the Uranium price held steady at $73.50 a pound as the US and UK push a pledge to triple nuclear power by 2050 at COP28.

China’s consumer spending outperformed in October, with retail sales rising 7.6%. Industrial production also beat, gaining 4.6%. But fixed asset investment growth missed, slowing to 2.9% in the first 10 months. The central bank left its key MLF rate at 2.5% and injected a net 600bn yuan ($83bn) into the banking system, the most since December 2016. Xi Jinping arrived in San Francisco for a high-stakes meeting with Joe Biden in his first trip to the US in six years. Biden said he’d consider the summit a success if the two sides can get back “on a normal course of corresponding.”

Source: Bloomberg

Company News

Experian has today released its financial report for the six months ended 30 September 2023, which highlighted the resilience of the business. The company reiterated its guidance for the full year, and in response the shares are up 5% in early trading.

Experian is a global information services company that helps businesses to manage credit risk, prevent fraud, target marketing offers, and automate decision-making. The group also helps individuals check their credit report and credit score and protect against identity theft. The company has credit data on 1.3bn people and 166m businesses. The ownership of such rich, unique, and valuable data has become more important in an increasingly digital world and the group is targeting a total addressable market of more than $140bn.

Experian operates an attractive business model where its customers supply the company with raw credit history data for free. The bureau aggregates it, applies analytics and tools, and sells it back to the customers as a credit report. The industry operates as an oligarchy with high barriers to entry because of large historical databases and regulatory know-how.

The company has shifted from simply selling data to selling enhanced decision tools and analytics software which are essential in automating customers’ decisions, helping to reduce cost, and manage risk. As a result, customer relationships are very ‘sticky’, with renewal rates of 90%, and revenue is very resilient. The business has a long history of weathering uncertainty – notably, revenue grew in organic terms in both 2008 and 2020. Although credit application volumes slow in a recession, we believe the company has a natural hedge of risk management and asset protection products, as well as exposure to healthcare and other defensive segments. Regarding, the potential opportunities and threats posed to the business by AI, we believe the company is well placed given its hard-to-replicate proprietary datasets with scope to accelerate product innovation and increase operational efficiency.

In the six months to 30 September, revenue grew by 5% at constant exchange rates to $3.4bn. In organic terms (i.e., underlying before M&A), growth was also 5%, in line with market expectations and the full-year guidance range of 4%-6%.

Against an unfavourable macroeconomic backdrop, with tightening credit markets, growth was driven by superior data, new product performance, and successful new business development. Highlights included the progress made across credit risk and fraud prevention, very strong progress in diversifying its business in Brazil, and successful expansions into markets such as health, identity, and verifications.

By division, B2B revenue was up 4% in organic terms as the group helped its clients with their shift to digital, to optimise profitability and better manage risk. Within B2B, Data and Decisioning were up 3% and 7%, respectively. The main weakness was in the North American mortgage business (-6%), although strength in other sectors (notably Health and Auto) more than compensated.

The Consumer Services unit grew by 6% in organic terms, an improvement following a weak first quarter. Experian now serves 178m free members, up 21m year-on-year, and delivered significant progress in Brazil and benefitted from elevated premium subscription revenue in the US.

The group saw growth in every region. In the group’s largest division, North America, which accounts for two-thirds of revenue, organic growth was 4%. Elsewhere, Latin America grew by 11% and EMEA/Asia Pacific was up 8%.  Growth in the UK & Ireland was only 1%, held back by weaker lending volumes.

‘Benchmark’ operating profit from ongoing activities grew by 6% to $929m, with the margin up by 20 basis points on a comparative basis to 27.2% as productivity initiatives more than offset the cost of growth investment. ‘Benchmark’ EPS rose by 8% to 70.4c.

The business is very cash generative, with conversion of 77% in the seasonally weaker part of the year. The group ended the period with financial leverage of 1.8x net debt to EBITDA, below the target range of 2.0x-2.5x. There is no debt refinancing due until September 2024 and over 90% of current debt is at fixed interest rates for the next two years. As a result, the group’s interest rate is only 3%. Cash flow is sensibly reinvested in organic and strategic investments that generate attractive returns. The first-half dividend was raised by 6% to 18c.

Experian continues to anticipate another year of growth due to the breadth and the resilience of its portfolio, and significant structural growth opportunities. The group has reiterated its full-year guidance to deliver organic revenue growth in the range of 4% to 6% and modest margin improvement, all at constant exchange rates and on an ongoing basis.

Source: Bloomberg