Thomson Reuters Corp (TSX: TRI) is a leading provider of business information services. Its product portfolio includes highly specialized information-enabled software and tools for legal, tax, accounting, and compliance professionals combined with the world's most global news service – Reuters.

Key highlights

• Striking business model: The company has an aggressive business strategy, with 90% of revenues coming from products delivered electronically or as software and services; moreover, 79% of the revenues are recurring, enabling robust and constant cash creation. The firm also has a solid competitive position in terms of exclusive content, data, and human knowledge mixed with artificial intelligence, and machine learning, which are major differentiators.

• Improved performance from the core segments: The company has placed its Legal Professionals segment, Corporates segment, and Tax & Accounting Professionals segment under the name of “Big 3” and these segments, collectively comprised 80% of the total revenues, with organic revenue growth of 6%. The group witnessed elevated revenues and margins in the Big 3 segment in FY 2021, compared to FY 2020, which is a significant plus. Currently, its “Big 3” operates in an estimated USD 29 billion market segment, which is expected to grow between 6% and 9% over the next 5 years.

Source: Company Presentation

• Forecasted robust growth and margins: The company's performance in the fiscal year 2021 has boosted management's confidence, and they recently emphasized the strong predicted figures on several fronts, which is a key plus. The company plans to increase revenue by 5% in FY 2022, with the Big 3 segments increasing revenue by 6% to 6.5%. The adjusted EBITDA margin would be around 35%, with USD 1.3 billion in free cash flow for the FY2022. Furthermore, the business aims to maintain a similar performance in FY 2023.

Source: Company Presentation 

• Industry beating margins: In FY2021, the company's operational efficiency and business resilience helped them leapfrog the industry median margins on numerous fronts, implying that the company has a competitive advantage over its peers, which is a key positive. This is depicted in the graph below.

 Source: REFINITIV, Analysis by Kalkine

• A consistent generator of Free cash flow:  The company has witnessed consistent free cash flows, which is applaudable. In FY 2021, the company generated a free cash flow of USD 1,256 million against USD 1,330 million in the previous corresponding period. Although this free cash flow was lower than in the prior similar period, these figures remain substantial given the global turbulence.

• Transforming into an innovator and builder of products: The company's product strategy has been developed to drive higher revenue growth through product innovation and new initiatives. The company is streamlining its portfolio and focusing on a smaller number of larger growth prospects. It is also integrating products into end-to-end customer solutions to increase cross-sell and up-sell potential.

• Long history of returning cash to shareholders: Despite the challenging circumstances, the corporation continued to pay dividends, proving its financial strength. It has boosted its annualized dividend by 10%m, from USD 1.68 per common share to USD 1.78 per common share in FY 2022, marking the 29th consecutive year of annual dividend increases. In addition, the company paid a quarterly dividend of USD 0.445 per share on March 15, 2022.

Source: Company Presentation 

Risks associated with investment: The company's capacity to service clients, as well as its profits and reputation, is heavily reliant on its own and third-party data centers, network infrastructure, telecommunications, and the Internet. Any faults or outages might threaten this ability. Furthermore, it must keep up with rapid technological changes to supply new products, services, apps, and features to suit the expectations of customers; failure to do so could have a significant negative influence on the firm.

Financial Overview of FY 2021 (Expressed in Millions of U.S. dollar)

Source: Company Filing 

• Growing revenue: The company’s full year reported revenues were up by 6% and organic revenues were up by 5%, to USD 6,348 million compared to USD 5,984 million in the previous corresponding period, thanks to strong results from the Big 3 businesses in Reuters.
  

• Operating profit in the reported period fell to USD 1,242 million against USD 1,929 million in pcp. The decline in the operating profit was mainly due to higher operating expenses witnessed by the group in FY 2021.
  

• Boosted earnings from continuing operations: The company witnessed robust earnings from its continuing operating in FY 2021, which stood at USD 5,687 million compared to USD 1,149 million in the previous corresponding period. The rise was mainly due to post-tax earnings in equity investments, which stood at USD 6,240 million.

• Elevated net income: Primarily due to higher revenue and robust earnings in equity investments, the company’s net income in the reported period increased to USD 5,689 million against USD 1,122 million in pcp.
  

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 77.70% of the total shareholding. Woodbridge Co., Ltd. and RBC Global Asset Management Inc. hold the company's maximum interests at 67.11% and 1.57%, respectively. The company's institutional ownership stood at 23.58%, and ownership of the strategic entities stood at 67.78%.

Valuation Methodology (Illustrative): Price to Cash Flow-based Valuation Metrics

Stock recommendation

The company's strong performance in the first nine months of the year continued into the fourth quarter. Its sales growth was outstanding once again, exceeding management's expectations and allowing it to close the year on a high note. As the business's performance has improved, it has begun to move toward the higher 2022 and 2023 objectives, which is a significant benefit. Customers throughout the world are upgrading Legal, Tax and Risk, Fraud, and Compliance products, which is helping the professional markets expand.

The products are proving to be well-suited to enabling them to efficiently serve their clients, which we believe will improve the company's cash flow in the near future. In addition, the company plans to invest in things that will help it develop faster and in which it has a strong foothold in growing markets. Furthermore, the company is still exploring strategic acquisitions to supplement organic growth and expand its position, which is a significant plus. Therefore, based on the above rationales and valuation, we recommend a “Buy” rating at the last closing price of CAD 132.77 as on March 23, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 23, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

Disclaimer

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