Vivian D. Labbe
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Vivian D. Labbe in Mergers & Acquisitions,

After Meeting With Management, BMO Is Bullish On the IHS-Markit Merger

BMO maintained its Outperform rating on IHS-Markit Ltd (Markit Ltd ) as it is bullish on the merger between Markit Ltd (formerly MRKT) and IHS Inc. (formerly IHS). The rating reiteration follows a meeting with management.

The comments come as IHS Markit provided first-time guidance after their combination.

For the fiscal year ending November 30, 2016, IHS Markit expects:

  • Revenue in a range of $2.735 to $2.765 billion, including Markit contribution between $445 and $455 million
  • Adjusted EBITDA in a range of $975 to $995 million, including Markit contribution of between $190 and $200 million
  • Adjusted EPS in a range of $1.72 to $1.78 per diluted share

BMO said the management provided a framework for the company's FY2017 outlook (full guidance will be provided in November). Following is a summary of the outlook:

  • "Adjusted EPS growth of 20 percent y/y (from the midpoint of the FY2016 guidance); assuming $6.15 per share (the midpoint of the $6–$6.30 per share range) and dividing by the 3.5566 transaction ratio yields roughly $2.08 in FY2017 EPS guidance."
  • "Share buyback of $1 billion in each of FY2017 and FY2018."
  • "Management reiterated its long-term target for IHS Markit to deliver: 'mid-single-digit' organic revenue growth with opportunities to accelerate adjusted EBITDA margin to the low- to mid- 40s range and "double-digit" adjusted EPS growth."

Further, management believes there are no risks to reaching its goal of $125 million in annualized savings in FY2019.

"We believe this is one area where the company could exceed expectations, specifically in the timing of these savings (annualized $35 million in FY2017; $100 million in FY2018; i.e., could occur earlier within each year)," analyst Jeffrey Silber wrote in a note.

On revenue synergies, Silber said management mentioned that it already had started the process to cross-sell four products (two each from IHS and Markit). It noted that these products would have high incremental margins (75–80 percent range) given they are already "built" for the most part.

Silber, who has a price target of $41 on the stock, expects EPS of $1.75 for 2016 and $2.05 for 2017.