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A lot of bad news around the Refinitiv acquisition is now priced in, so will 2022 be a brighter year for the business?
Thursday 23 Dec 2021 Author: Mark Gardner

This trade requires taking a contrarian view. Market sentiment is weak towards the stock, yet the valuation has become attractive for what is fundamentally a decent business.

Shares in London Stock Exchange (LSEG) have fallen by a third in value since February on concerns surrounding integration costs associated with the group’s $27 billion acquisition of data provider Refinitiv. However, owning Refinitiv gives London Stock Exchange a new lease of life.

It transitions the group towards higher margin subscription data and analytics revenue, as well as reducing its dependence on volatile stock exchange related business.

It secures the group’s position in the critical growth markets of Asia and America, and it creates the opportunity for the shares to re-rate as a data company.

It also enhances the group’s geographical scale and scope, specifically in the key markets of Asia and America.

The combination of Refinitiv’s foreign exchange and fixed income venues with London Stock Exchange’s equities, ETF and derivatives businesses will undoubtedly foster innovation and new product offerings.

The combined group’s data offering will benefit from the increased adoption of algorithmic and quantitative trading, coupled with the heightened demand for passive and multi-class asset investments.

It currently trades on 20 times forecast earnings per share for 2023, which compares with European and US exchange peers that are also trading on 20-times and information peers on 32-times.

Alex Crooke, fund manager of Janus Henderson’s Bankers Investment Trust (BNKR), believes that ‘while short term costs and higher investment needs have impacted the shares this year, it has created an opportunity to own a high-quality business with large recurring revenues on an attractive valuation.’

The attempt by HKEX (Hong Kong Exchanges and Clearing) in September 2019 to acquire London Stock Exchange for $39 billion reflects the unique nature of the target’s market infrastructure and data assets.

In essence London Stock Exchange is a trophy asset, benefiting from incumbency, high barriers to entry and a dominant local market position.

There are risks in buying a stock when its shares continue to fall as it needs a catalyst to stop the decline. Full year results on 3 March could be the catalyst to win back the market’s favour.

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