Exchange provider and information services firm had a strong first quarter
Thursday 09 Jun 2022 Author: Mark Gardner

London Stock Exchange Group (LSEG) £74.38

Loss to date: 4.7%.

Original entry point: Buy at £78.12, 12 August 2021

Although London Stock Exchange Group (LSEG) is trading nearly 5% below the level at which Shares recommended buying the stock, we remain confident in the investment case.

First quarter results (27 April), saw management confirm they were on track to deliver targets of 4% to 6% revenue growth in its data division and 7% at the group level.

Net debt to earnings of 2.5 times provides it with the scope to participate in either value-adding bolt-on acquisitions or share buybacks.

Earnings per share are forecast to rise from 334.4p in 2022 to 381.6p in 2023, a 14% increase.

This places the stock on a 2022 price to earnings ratio of 22.2 times, falling to 19.4 times in 2023.

The valuation represents a discount to the wider exchange sector, which in Berenberg’s view is unjustified given its superior growth and lesser reliance on revenue linked to trading volumes.

First quarter results saw data and analytics revenue of £1.15 billion, marginally ahead of a consensus forecast of £1.14 billion year-on-year at constant currency.

Critically, annual subscription revenue (ASR), accelerated from 4.6% at the end of 2021 to 4.9%. This implies good momentum for the rest of the year and highlights the growing prominence of higher-quality recurring revenue for the group.

The trading and banking arm delivered revenue of £378 million, also slightly above a forecast of £374 million.

Encouragingly the division’s revenue continues to accelerate towards the target of low single digits over the medium term reflecting the benefits of recent investments in the business.

At the end of the first quarter, £25 million of revenue synergies associated with its acquisition of information provider Refinitiv had been achieved out of a full year target of £40 million to £60 million.

Three recently announced acquisitions Quantile (post-trade risk management solutions), TORA (US cloud-based technology provider), and GDC (global identification provider), are on track to close this year, and will enhance the scale and scope of the company’s offering.

London Stock Exchange is also a beneficiary of rising interest rates. 60% of TradeWeb’s (electronic bond and interest rate swaps) trading revenue is driven by rate activity and a steepening in UK rates will improve the group’s net interest income.

SHARES SAYS: Despite a recent wobble in the share price we see no reason to change our view and remain buyers.

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