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THOMSON-REUTERS CORP TRI.
January 08, 2021 - 11:15pm EST by
compass868
2021 2022
Price: 80.62 EPS 2.25 2.55
Shares Out. (in M): 498 P/E 28.1 24.8
Market Cap (in $M): 40,184 P/FCF 28.1 24.8
Net Debt (in $M): 2,568 EBIT 1,500 1,635
TEV (in $M): 42,751 TEV/EBIT 22.6 20.9

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Description

Overview & Brief History:
 
TRI is a scaled information services business, dual listed in the US and Canada. TRI has 3 businesses:
 
1) Core information / business services which is 80% of revenue. This is 90% recurring revenue business
growing 6-7% organically (4% in 2020 due to Covid slowdown). The 3 main segments are Legal,
Tax/Accounting, and Corporates.
 
2) Reuters news, which is 10% of revenue. This is mostly a pass through no-EBITDA business that is the
Reuters news franchise.
 
3) Global print, which is 10% of revenue (declining 5% annually). This is the legacy legal print business
that is becoming a smaller part of the business mix.
 
TRI began part 1 of its multi-year transformation in 2018 with the sale of a majority stake in its Financial
& Risk business to Blackstone. This transaction began the simplification of TRI's structure, allowing the
management team to begin to focus on the remaining businesses (F&R business was 50% of total
revenue and had been a flat revenue grower for a decade). After Blackstone operated the business for 12-months,
Blackstone and TRI reached a deal in August 2019 for LSE to acquire the entire F&R business, which will
close in 1Q 2021.
 
Accounting for the after-tax value of the LSE stake, TRI currently trades at 16x 2021 street EBITDA (which
we will outline below is significantly too low). Peers FDS, VRSK, MCO trade at 22x, 25x, 20x, respectively,
& peer INFO sold to SPGI in December 2020 for 26x.
 
 
Why does the opportunity exist:
 
Despite a $42bn enterprise value, TRI is historically underfollowed by US investors. 15 sell side analysts
have ratings and 8 are Canadian analysts. The main reason why US investors have ignored is because of
TRI's underperformance for a decade after the company purchased the original F&R business in 2008.
From 2009-2018, TRI's organic growth on a consolidated basis was LSD% (compared to peers M-HSD%)
and the stock was a material underperformer. From end of 2009-beginning of 2018, TRI returned 35%
vs. SPY 137% and peers FDS, VRSK, MCO 189%, 209%, 444%, respectively.
 
Following the F&R sale, TRI's stock has performed closer in-line with peers (+70% over the last two years
vs. FDS +71%, MCO +89%, VRSK +116%, SPY +40%), but the company is on the cusp of engaging in the
second part of its transformation effort.
 
 
What is the value creation opportunity:
 
After the F&R sale process was finalized, management has begun to turn to streamlining the "remain-
co" operations. TRI has historically been run as a conglomerate, with each business segment running
core back-office functions which creates inefficiencies and duplicative cost.
 
The consolidated EBITDA margin of the business is 32% and the information services segment has a
margin of 36%. Given the scale of the company (over $4bn in information services revenue), the
company will ultimately realize cost savings and efficiencies to bridge the margin gap with its peers. A
company of this scale with a M-HSD% growth profile should have margins in the low 40% area. For
instance, the following outlines the revenue size and EBITDA margins of core peers:
- FDS: $1.6n revenue, 36% margins
- VRSK: $2.8bn revenue, 50% margins
- MCO: $5.3bn revenue, 50% margins
- INFO: $4.3bn revenue, 43% margins (and SPGI is taking out further cost in the merger) .
 
Management is well aware of this gap, and has hired two additional key executives in the beginning of
2020 to plan out a restructuring and attack the margin opportunity.
 
They are likely to hold an investor day in early 2021 and will lay out the multi-year value creation plan
over the coming quarters.
 
 
What is the stock worth:
 
This setup is attractive because we have revenue growth acceleration (2021 and 2022 consolidated
revenue growth expected to be 5-6% vs. street at 4%), the margin expansion catalyst, an unlevered
balance sheet, and a stock trading at a material discount to peers.
 
Assuming 2022 EBITDA margins can expand 300bps to 35% from 2020 levels, TRI is trading at 15x 2022
EBITDA. Assuming can expand to 37%, TRI is trading at 14x EBITDA.
 
Applying an 18x multiple (still a significant discount to peers), gets to a price target range of $97-100
(+20-25% in a year, which is attractive for a low volatility name).
 
The 2-year bull case is $120 (+50%)
-20x 2023 EBITDA with 38% margins: $52bn of EV
-LSE stock continues to appreciate: $10bn of EV (after-tax)
 
Additional optionality is giving some value to Reuters business and putting some value on a potential re-
levering. Current net debt to EBITDA is 1.3x. If TRI goes to 3x a normalized EBITDA number, that would
give an additional $5bn of leverage capacity. If they can buy assets at 20x EBITDA, that is $250mm
additional EBITDA uplift (10% uplift). If they have to pay 25x EBITDA, that is still $200mm of additional
EBITDA, which is value accretive to equity borrowing at 3%.
 
Downside is limited as this is a relatively and absolutely cheap name (SPY trades inline on EV/EBITDA)
with limited leverage, self-help margin opportunity, and accelerating revenue growth into next year. TRI
is a leader in its product categories and we see limited long-term obsolescence or disruption risk.
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

 

Closing of LSE transaction

Investor day in early 2021

Management lays out and executes new margin targets

Levering balance sheet more in line with peers

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