1
Equities
●
Business Services/Europe
July 2019
Introducing Digital Business Services as a sub-sector
We initiate coverage of Informa and Wolters Kluwer in this report, expanding our coverage of
the Digital Business Services (DBS) sub-sector. Along with Cerved, Edenred, Experian and
Relx, these six stocks represent cUSD120bn of market capitalisation.
DBS companies primarily benefit from the trend of increased corporate digitisation, as well as
customers’ growing reliance on data and analytics. Over the last couple of decades, corporations
and institutions have invested in digital and data infrastructures. This has created an excellent base
for future digitisation. Unlike other discretionary expenditure, corporate boardrooms are increasingly
viewing their digital budgets as unalterable and their digital strategy as core to positioning their
companies for the future.
Digital and IT budgets tend to be multi-year projects, require alteration of workflows, and often
operate in a highly regulated environment. Once the DBS companies are embedded in corporate
workflows, the risk-reward balance of displacing them is poor for their customers. That creates a
recurring revenue base for the DBS companies and is a source of pricing power. Their scale, high
margins and access to proprietary data permit them to invest in innovation, further protecting them
from new entrants. This provides greater visibility of growth in medium term. The absolute and
relative attraction of such growth stories is rising in a world where businesses are struggling with the
paucity of economic growth, tariff wars and increasing regulations.
Investors assessing “the right approach” for valuations
Many stocks in the space are trading at elevated multiples relative to their history. That said, we think
the relative valuation compared to the growth they offer is still attractive. The receding conviction on
valuations from the sell-side consensus creates an opportunity in some names, in our view. Our
preferred stocks are Informa and Relx. We downgrade Experian to Reduce. This report explores the
medium-term value creation potential of the DBS sub-sector. Our research includes:
Analysis of the corporate digitisation trends and budgets
Markets that offer near-term growth opportunities
Analysis of the disintermediation risks
Bottom-up analysis of sustainability of growth
Accounting for the leakages to earnings growth
Scenario theoretical upside analysis for long-duration investors
Executive Summary
Regulatory risks and tariff wars have increased investors’ preference
for companies exposed to corporate digital budgets
The trends in the ever-rising corporate digital budgets reveal
attractive long-term investment opportunities
We initiate coverage of Informa and Wolters Kluwer with Buy ratings,
downgrade Experian to Reduce on valuation grounds
Pan-European Business Services
Equity Analyst
* Employed by a non-US affiliate of HSBC
Securities (USA) Inc, and is not registered/
qualified pursuant to FINRA regulations
