Despite the cloudy economic outlook, demand for credit applications has proved resilient, as UK FTSE-100 listed, global credit bureau Experian [LON:EXPN] reported in its half yearly report on Wednesday (16th November). The company supplies banks and other credit providers with credit reports on individuals looking to take out a loan, whether for mortgages or car finance schemes; and also offers services to consumers looking to improve their credit ratings and benefit from cost savings.
Solid results for Experian came as both the North American and Latin American businesses grew strongly at 8% and 18% respectively. Both geographies benefited from strong growth in their Consumer Services business. In North America, the consumer arm grew at 12% as the company benefited from 10 million new memberships for services such as ‘Experian Boost’ aimed at securing lower interest rates for consumers. In Latin America the consumer arm grew by 29%, with the company adding 11 million new memberships to its consumer service platform. In European markets, results were slightly weaker, with growth in the UK of 5% and the Europe, Africa and Asia divisions delivering growth of 4%.
Continued momentum in Latin America
Buoyant results from Latin America for the half year will provide the market with further reassurance of Experian’s vision to significantly expand in the region. Currently 11% of Experian’s revenues are derived from Brazil, which is the fastest growing area of the business. Brazil has suffered for a long time from a lack of regulation in credit markets and a thin data set available to credit providers on individual consumers, resulting in less loans being issued across the region, at much higher interest rates.
However, credit markets in Brazil are undergoing significant reformation brought about by change in regulation. These changes intend to expand access to affordable credit for consumers and small and medium enterprises (SMEs). In 2019 Brazil implemented a new law allowing credit bureaus to provide banks with ‘positive data’ from consumer credit history, creating a deeper, more useful dataset that Experian can provide to banks in order to reduce finance costs for Brazilian consumers.
The company noted that since reforms have been enacted, they have launched over 190 positive data products and have also developed new products specifically tailored to address high growth segments of the Brazilian economy, such as agricultural lending. Since launch this has helped lift 22 million consumers into eligibility for accessing credit, where they wouldn’t have achieved it otherwise.
A resilient business model
With a gloomy outlook ahead, Experian has been sure to remind investors that its business is in a good position regardless of the economic cycle. Speaking to analysts at the Barclays Credit Bureau Forum in September 2022, Experian’s chief executive, Lloyd Pitchford, noted that since listing in October 2006, Experian has never reported a period of negative organic growth – even throughout the great financial crisis. This recession avoiding phenomenon typically derived from the fact that many consumers look to take out loans and improve their credit position during times of economic hardship.
There are reasons to believe that Experian is in an even stronger position now than throughout previous market downturns. The business now has a larger exposure to revenues from Brazil, which is not correlated to the health of larger economies such as the U.S. Experian also benefits from more diversification with Healthcare and Consumer verticals, which are seen as less cyclical in nature.
‘I think if you look at our portfolio and compare it back to the GFC in 2008-2009, we’re clearly less exposed to the US GDP cycle than we were then. And there’s a few reasons for that. Our Brazil business is bigger than it was back then, and we have the health business that we didn’t have back then. And we have a much more diversified business in the consumer segment.
Lloyd Pitchford – Barclays Credit Bureau forum 2022
Experian’s robust position, and to a greater extent, being on the right side of a deteriorating value in GBP versus the US Dollar, has helped the shares outperform its credit bureau peers Equifax and TransUnion by a wide margin over 2022.
Source: Google Finance
Experian opened trading today (18th November) at 2,878p and has offered a year-to-date return of -20.8%, a one-year return of -14.7% with the company’s shares ranging between 2,242p and 3,689p over a 52-week period. The company has a market capitalization of GBP26.5bn
With Experian’s 15% fall in share price over the course of 2022, this leaves the company trading at a fairly full valuation of 28x forecast earnings next year. With strong growth prospects in Latin America, and a resilient, countercyclical element to the business, this may be as cheap as the shares are going to get.