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I think this ‘hidden’ growth share is a buy

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It seems laughable to describe a company with a £34bn valuation as a ‘hidden’ growth share. But if quiz show Pointless ever did a round on FTSE 100 constituents, I’d bet money that RELX (LSE: REL) would be a pointless answer.

However, RELX is no stranger for top fund managers. It is a core holding of Nick Train’s Lindsell Train Global Equity fund and the TB Evenlode Income fund.

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A growth share with a niche market

RELX is an information and analytics company. It publishes a range of scientific, medical and technical journals for specialist markets. Notably, it provides the popular LexisNexis legal database.

Because these are niche markets, they give RELX an economic moat, making it difficult for new competitors to enter the industry. Customers are prepared to pay for quality, and this has resulted in revenue and profit growth each year from 2015 to 2019. Its three largest divisions, accounting for 87% of adjusted operating profit, saw revenue marginally increasing during H1. This shows very strong resilience in trading during the pandemic.

The dividend has also been progressive, rising from 29.7p per share in 2015 to 45.7p at the end of last year. RELX announced today that its interim dividend would remain unchanged at 13.6p.  At 2.7%, there are bigger dividends out there. But it looks secure, is well covered by earnings and I see RELX as a long-term hold growth share.

Share price under pressure

The shares opened down about 4% this morning at around 1,700p on the back of the updated trading statement. The problem area for RELX is its trade shows and exhibitions. The coronavirus pandemic has, as you would expect, decimated revenues here, falling to £201m from £684m. The division swung to an operating loss of £117m against a profit of £231m last year. 

Overall this has resulted in a 10% drop in interim revenue and a 24% lower adjusted operating profit. Thankfully for RELX, trade shows and exhibitions only account for 13% of profits and its largest divisions seem to be performing well. 

There is also no denying that this is an expensive share. Even with the recent pullback in its price, the trailing potential price-to-earnings ratio is still 23 here.

This may be over-simplifying it, but the share price has fallen approximately 20% from its year high. However, revenues are down by only 10% and the largest business divisions are still seeing growth.  Broker Berenburg rates RELX as a hold with a price target of 2,080p.

In my opinion, the problems it is facing in its events division are temporary. Deutsche Bank agrees and has forecast that revenues should return to normal by 2022.

Therefore, I see this as a good entry point into a fantastic growth share. I fully expect revenues and profit to return to growth from 2021. I already own shares in RELX, but I might be looking to add some more if the share price dips any further.

A Top Share with Enormous Growth Potential

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Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business (yes, despite the pandemic!).

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has previously helped it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 it returned a whopping £150m+ to shareholders in dividends and buybacks!

And here’s the really exciting part…

While COVID-19 may have thrown the company a curveball, management have acted swiftly to ensure this business is as well placed as it can be to ride out the current period of uncertainty… in fact, our analyst believes it should come roaring back to life, just as soon as normal economic activity resumes.

That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.

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David Barnes owns shares in RELX and has a position in the Lindsell Train Global Equity fund. The Motley Fool UK has recommended RELX. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.