Hunting for Compounders - Wilmington

Risk has a habit of becoming invisible in good times, and painfully apparent in bad times.

The past couple of weeks have been concerning for many and, I suggest, a reminder of the real value of quality companies: not only can some of them grow for longer at higher margins, but their sound financial positions provide some protection (assuming the shares are reasonably valued).

That makes it easier to sleep at night when markets are buffeted by macroeconomic or geopolitical developments. And, over the long term, preservation of capital and risk management are key.

One stock that’s held up better than most over the past couple of weeks has been Wilmington (LON:WIL) . It’s got a number of favourable characteristics, including:

• A lack of share dilution over time,
• High profit margins and ROCE,
• Strong cash conversion,
• A net cash position,
• Solid track record of dividend payments,
• Recurring revenue with high renewal rates (around 38% of total)
• A resilient portfolio of brands in essential Regulatory and Compliance markets, and
• A diverse customer base.

Not all companies that have these traits are good investments, but good investments tend to have these kinds of traits. You can see some of this reflected in the strong (and improving) Quality Rank.

As for Wilmington itself, while it does show promise as a solid company, consistent profitable growth has proven more elusive.

However, an operational restructuring completed in 2021 (after three years of review) suggests now is a good time to reappraise the group’s prospects.

Simplified operating structure and essential services

Wilmington floated on the London Stock Exchange in 1995, and has in the years since built up an increasingly digital portfolio of products that provide regulatory compliance solutions to customers. It calls this the GRC market: Governance, Risk, and Compliance.

It generates revenue across multiple geographies and has low customer concentration.

The group provides online and hybrid learning, as well as the management and provision of mission-critical information and data. Solutions are focussed on real-world outcomes and are based on ‘significant and defendable intellectual property built up over many years’. Its teams of experienced industry practitioners and subject matter experts are central to the offering.

It now reports to investors across two divisions: Information & Data and Training & Education.

Information & Data - provides essential risk and compliance data to a range of industries globally, including insurance, pensions and healthcare. The group says its information and data represent the ‘gold standard’ in accuracy and timeliness, complemented by its teams of research analysts and industry practitioners. Much of the data is developed by Wilmington’s teams, and it owns the associated intellectual property.

Training & Education - provides compliance training and technical support for customers across a range of industries including financial services, accountancy and healthcare. This ranges from formal qualifications, continuing education and mandatory training, through instructor-led and self-guided formats. Course content is developed in house by its team of subject matter experts.

Revenue is split pretty much 50:50 between these two segments and both have double digit operating margins of 15-20%.

The company has only recently begun reporting results this way and so year-on-year data is lacking, but an important component of the investment thesis is that this simplified structure can lead to more focused and profitable growth in future.

History - from B2B publishing to specialist data and education

Back in 1995, Wilmington floated and was structured as two operating divisions: Wilmington Publishing and Waterlow Information Services. Its primary focus was specialised publishing in a variety of B2B industries.

In 2000, it acquired Binley’s, the UK market leader in the provision of healthcare data and market-intelligence services. This signalled the group’s growing appetite for information-provision services (Binley's has since become an integral part of Wilmington Healthcare).

2001 - Wilmington created the International Compliance Association (ICA) in response to growing importance of compliance regulation in financial institutions. This has grown to become a leading association and education provider with offices and training worldwide.

2007 - Wilmington sold its trade magazines in non-core markets as it moved away from advertising revenues.

2010 - Wilmington announced its acquisition of Axco Insurance Information Service, described at the time as ‘the latest step in our plan to build a world class, international, compliance and regulatory information and training business.’

2013 - Wilmington acquired Compliance Week, based in Boston.

2014 - New CEO initiates a restructuring 'to support the adoption of our new knowledge-based business model.'

2015 - Acquired Financial Research Associates (FRA), based in Charlotte, North Carolina.

2016 - Acquisition of SWAT UK, subsequently incorporated with Mercia. This acquisition enhanced the range of innovative solutions available to accountancy professionals to help them stay ahead of ever-changing regulations and technology developments.

2017 - acquisition of HSJ, the UK’s pre-eminent health information, insight and networking business.

2021 Wilmington announced the simplification of its portfolio into two new operating divisions: Information & Data and Training & Education, to reflect its focus on the large and growing Governance Risk and Compliance and Regulatory Compliance markets.

It’s that last point which is the key: a simplified operating structure and renewed strategic focus, which could set the stage for growth in the years ahead.

Strategy - the silver thread

Over the years, Wilmington has struggled to articulate the overarching strategic vision behind its acquisitions. You might say the M&A up to 2021 was opportunistic or slightly ad hoc, with a subsequent lack of cohesion in the overall portfolio as a result.

That’s the ‘old’ Wilmington though. Here’s the link to Wimlington’s ‘New Structure’ presentation released in June 2021. The ‘silver thread’ connecting the group’s operations is that all of its businesses operate in the GRC and Regulatory Compliance markets.

This evolving domain concerns how companies and individuals understand and align their activities with the relevant legal, policy and regulatory frameworks. It’s a good area to specialise in, because the GRC markets are underpinned by strong growth drivers, including:

• Increasing volume of regulation,
• Increased risk of fraud and cyber attack,
• Evolving compliance roles and requirements,
• Increasing regulatory enforcement,
• The rise of ESG,
• Increasing adoption of technology.

They’re large and growing markets: Information & Data operates in the $1bn regulatory intelligence marketplace while Training & Education is in the $4bn compliance training market. Both present organic and inorganic growth opportunities.

The group’s customers are coming under increasing pressure to ensure that they not only comply with regulation but are also adequately protected against a growing range of external risks. These actions also need to be externally verifiable.

This simplified reporting structure is not a superficial change - the three year review that underlies it has also resulted in an increasingly integrated enterprise, with a more unified take on IT systems, sales and marketing, and new product development. It also brings a renewed focus on discipline and capital allocation, suggesting a company that is better equipped to maximise value from acquisitions.

In the most recent HY22 interims, the group comments:

Our strategy is to grow revenues and profits organically in the large, growing and rapidly evolving GRC and Regulatory Compliance markets by investing in our business and actively managing our portfolio of businesses.

Our investment focus is on establishing single technology platforms for each division. This supports our digital-first approach and will enable the Group to grow organically and by acquisition more efficiently which will ensure we continue to maintain high margin levels.

In particular, management wants businesses with the following characteristics:

• Digital capabilities,
• Differentiated offering,
• Product and revenue model,
• Data enabled,
• Attractive markets,
• Strong leadership.

So the group’s businesses are being reviewed more critically, with those that don’t add value getting jettisoned. Take the sale of AMT for example, which has just recently materially improved the Wilminton’s balance sheet.

* Note the most recent total debt figure includes £7.75m of capital lease obligations

Reasonable valuation and improved growth prospects

Valuation and rerating potential

Wilmington’s valuation does not seem demanding given the developments.

That’s a cheaper and higher yielding stock than the FTSE All Share average (of 15.2x PER and 2.7% yield) but I would argue it is significantly higher quality, especially given its recovering ROCE and margins.

I think there’s a fair chance that Wilmington can drive real value for its shareholders over the coming years, if it can execute well.

Historically, Wilmington has been benchmarked against a strict B2B media and information peer group, but the group’s business mix has moved away from events and towards purer information, data and platform solution players such as GlobalData and Learning Technologies. These companies tend to command higher multiples.

So it’s quite possible that the market will at some point change its perception of Wilmington, which could result in a rerating.

Investing in technology

Organic investment continues at pace.

We have continued to refine and embed our digital capabilities across the business, reflecting our ambition to create a fully digital enterprise whilst retaining the flexibility to offer our customers face-to-face and hybrid solutions.

In the Training & Education division it has recently established a Digital Hub in ICA, rolled out the solution to Bond Solon and is now moving the Accountancy training business onto the platform over the next 12 months.

In the Information & Data division, it is establishing a single data platform for all lines of business based around ‘Snowflake®’ technology and expects this project to roll out over the next two years.

Investing in people

Wilmington is also investing in sales and product management academy roll outs, which have started to deliver returns in revenue growth. An increased focus on pricing and packaging is also driving revenue gains, and the group increased the number of multi-year subscription contracts in H1 FY22 as a result of this.

Strengthened balance sheet provides firepower

In December 2021, Wilmington sold AMT Training to Train The Street for an enterprise value of £23.4m, resulting in a net cash position. It is also looking for a buyer for its Spanish insurance business, Inese.

The group intends to use this cash (as well as its £65m bank facility) to acquire suitable GRC businesses.

Recent trading

Half year report, Feb 21 2022

Previous results suggested positive organic performance from both Information & Data and Education & Training. The half year update confirmed this, and a combination of healthy H1 organic growth (approaching 10% on a pre-FX basis) and underlying margin gains drove a strong performance.

Brokers upgraded their forecasts and hinted at more potential upgrades to come.

Conclusion

It’s still early days for Wilmington, but the foundation is there for a bright future given the solidly profitable operating base and the existing market positions from which it is executing this revised strategy.

This is not some risky startup. It’s an established, profitable, cash generative enterprise with market expertise and a good track record of delivering returns to shareholders.

The organisational restructuring is a meaningful set of changes designed to drive future growth.

There might not be a ‘big bang’, but can it grow ahead of the rest of the market in the medium term? I think there’s a good chance of that on account of the reasonable valuation, rerating potential, its existing high quality businesses, and the group’s ability to acquire and invest in the years ahead.

The shares have been strong recently, but I would argue that there is further potential given the changes that have been made. There will be risks as well - unfortunately I haven’t been able to go into them in this post, and they do need to be investigated - but Wilmington so far presents itself as a solid candidate for further research.