2023-09-02 04:25:47 ET
Summary
- London Stock Exchange Group's H1 results confirm a longstanding buy, given new partnerships and M&A optionality.
- The company's operating leverage is working, and we positively emphasize revenue growth in Post Trade and Data & Analytics divisions.
- Higher DPS and ongoing buyback make the company a clear buy.
Here at the Lab, we like financial businesses and have a good grip on Insurance and Banking. In a tighter circle, we overweight the diversified financial companies with supportive buys on Euronext and Deutsche Börse. In June, we released our new estimates on the London Stock Exchange Group plc ([[LDNXF]], [[LNSTY]]), confirming a long-standing buy. Our supported investment was backed by 1) a volatile market with cyclical support, 2) a defensive character , 3) higher recurring revenue, and 4) Artificial Intelligence with data upside. Since our update, the Group lost 4.42% in stock price; however, after analyzing the H1 results, we fully confirmed our valuation.
Mare Past Analysis
Changes to Estimates
Following the H1 results, these are the changes in our estimates:
- In our base case scenario, we anticipated 5%-6% revenue growth in 2023. Our updated top-line sales projection stands now at 7.5%, which aligns with the company's guidance of " revenue growth towards the upper end of the 6-8% " range. This is backed by solid turnover achieved in H1, in particular in the Post Trade and Data & Analytics divisions;
- Going down to the P&L analysis, the company recorded higher expenses than we had forecast, with negative currency development being particularly noisy in the period. FX impacts brought about an implied 4.6% increase in costs. In addition, the company had a negative one-off of €30m non-cash on the balance sheet, pushing expenses further. We previously anticipated expenses growth in the 2%-3% range; we are now including a plus 6.1% by year-end;
- The company updated its operating margin with 2023 guidance for the " adjusted EBITDA margin of approximately 48%. " Here at the Lab, we now anticipate a margin of 47% with an improvement to 49% and 51% in 2024 and 2025, respectively;
- Net-net: Given LSE's positive operating leverage, we decided to raise our income growth by 0.5% in 2023 on a constant currency basis, slightly increasing by 2% our EPS target for this year. These positive movements led to a 2% increase in our price target.
LSEG H1 Financials in a Snap
Source: LSEG Q2 results presentation
Supportive Upside
- Given the company's significant progress with Microsoft over the last semester, we are optimistic. Across LSEG and Microsoft, there are hundreds of people working together globally. As a reminder, Microsoft bought 4% of the London Stock Exchange Group last year. The exchange company will progressively transfer its infrastructure and services to the cloud, choosing Microsoft's Azure as the destination. The London Stock Exchange will integrate Microsoft Teams for communications and use artificial intelligence to improve financial analysis data. In H1, despite lower sales in the capital markets division, post-trade activity and Data increased sales growth by 7.6%, and this result provides a leading indicator for the future;
- Following the H1 analyst call, management emphasized that the network effects matter to support the above point. The market underappreciated improvements in the Group Data and Analytics business. LSE Head of Trading commented that cross-selling initiatives are also rising;
- LSE has leverage capacity and M&A optionality. Here at the Lab, we believe the EBITDA/debt target is too conservative. We welcome higher targets in the 1.5-2.5x range (from 1-2x). This should provide ample liquidity for inorganic growth.
For further details see:
London Stock Exchange Group: Strength And Breadth