2023-03-18 04:26:55 ET
Summary
- 4Q22/2H22 financial results are in line with expectations and management's guidance for 2023 is slightly above expectations.
- The turnaround in Trading & Banking is strong and accelerating, with increased synergy guidance from the Refinitiv deal.
- Capital allocation is transparent, with a share repurchase program and a focus on integration before further M&A.
Investment thesis
I am especially fond of London Stock Exchange Group ( OTCPK:LNSTY ) because of the exposure it has from the ownership of FTSE Russell. Also, I think the Refinitiv deal makes a lot of sense strategically and will help propel the LSEG forward in its goal of becoming a dominant player in global market infrastructure. Overall, I have a buy recommendation.
4Q22/2H22 print
Based on my analysis, LNSTY's 4Q22 and 2H22 financial results are in line with the consensus for 2H22, and the company's 2023 guidance is slightly ahead of expectations. ASV improved by 40bps sequentially as of 4Q22, reaching 6.2%; management projects even more growth in 2023. Management has also guided to a revenue growth of 6-8% for FY23, an adj. EBITDA margin of 48%, and a business as usual capex of £750 million. This revenue guidance for 2023 appears to me to be slightly above market expectations, while the margin guidance appears to be about in line.
Trading & Banking turnaround
The turnaround in Trading and Banking, in my opinion, is strong and quickening. This is evidenced by two main factors. First, 2022's sequential growth over four consecutive quarters supports my view that underlying execution will be strong. To give some background, historically, this segment has been a sluggish contributor to the P&L as a whole, slowing expansion. As such, the growth in 2022 deserves an applaud. Second, a huge sign that things are going well is that management has increased the Refinitiv revenue synergy guidance from £225 million by 2025 to now £350-400 million. The improved expectation is anticipated to be propelled by both the high demand for data from FTSE Russell customers and the development of new FTSE Russell indices (which will make use of Refinitiv's data). As a result, I continue to be optimistic about Trading & Banking's continued growth, as I believe that gains in customer retention, sales, and pricing will continue fueling growth momentum. In addition, there is also further upside potential from the Microsoft ( MSFT ) partnership.
Microsoft partnership
I believe the MSFT partnership will take some time before reflecting its impact on LNSTY P&L given both parties need to iron out the exact product and implementation details. Anyway, I believe the partnership is sensible and should benefit LNSTY from 3 areas.
- LNSTY's customers will have easy access to data and products via the cloud thanks to the company's robust data platform. This should improve customer UI/UX and productivity, which should improve retention rates
- LNSTY will be able to make use of cutting-edge modeling and analytics to enhance the productivity of customers’ workflows. Within this broad category could be many variations of it, which LNSTY could offer as a bundle (to improve retention rates), or sell as a stand-alone add-on which could further improve ASP
- By embedding into Microsoft Teams, LNSTY will be able to delve even deeper into the workflow processes of end users. There will be complete compatibility between Workspace and Microsoft programs then. Including the incorporation of AI-powered analytics and collaboration within Teams, I anticipate a significant improvement in efficiency for those working in the financial markets.
With all these products rollout and implemented, I expect management to revamp its pricing model to improve ASP without making it obvious. Management could implement a tier level pricing where different tier levels will have different functionalities available. This would make it more enticing for users of different levels. All in all, I expect the partnership to create value through volume growth, new market growth and pricing growth.
Capital allocation
With regards to the return of capital to shareholders, in 3Q22, management announced a £750 million share repurchase program with an expected completion date of July 2023. I really appreciate that management is being transparent about their plans for maintaining a steady approach to allocating capital in the near future. Importantly, given the company's good prospective visibility on cash generation, management will keep actively considering how it returns capital to shareholders. In terms of M&As, LNSTY has planned four bolt-ons for 2022; however, management is currently focused on completing the integration and subsequent transformation of the former Refinitiv business and meeting the revenue and cost synergy targets set out in the company's strategic plan. I believe this shows what priorities of LNSTY management, in that growth at all costs is not their game.
Risks
For LSEG, the overall market climate remains the biggest threat, as it affects trading revenues and potential IPO fees. The market would likely react negatively if the revenue growth targets set for the deal with Refinitiv were not met or if the LSEG was unable to realize the synergies promised.
Conclusion
I maintain my buy recommendation for LNSTY. The turnaround in Trading & Banking is strong and accelerating, with increased synergy guidance from the Refinitiv deal. Additionally, the MSFT partnership presents significant upside potential, with expected benefits for both customers and LNSTY ASP. The company's transparent approach to capital allocation is appreciated, with a share repurchase program and a focus on integration before further M&A. Overall, I believe LNSTY is well-positioned to become a dominant player in global market infrastructure and represents a good investment opportunity.
For further details see:
London Stock Exchange: Positive On The Progress Of Refinitiv Deal