ii view: LSE shares slump after results published

The purchase of data company Refinitiv is now complete, but the City isn't happy. We assess prospects. 

Full-year results to 31 December 2020

Chief executive David Schwimmer said:

"Completion of the acquisition of Refinitiv in early 2021 marked an important milestone in LSEG's history. This transformational transaction brings together two highly complementary global businesses with a shared commitment to Open Access. LSEG is now truly global with a significant presence in North America, Europe, Asia and emerging markets, bringing together exceptional skills and experience at scale. While early days, the work we have done so far confirms the quality of the business and the extent of the opportunities across the Group as we focus on integration and delivering the strategic and financial benefits of the transaction to our customers, shareholders and other stakeholders. LSEG is well positioned for long-term sustainable growth in a continually evolving landscape as a leading global financial markets infrastructure and data provider."

ii round-up:

Today’s results from the London Stock Exchange Group (LSE:LSEG) were its first since completing its $27 billion acquisition of financial data and analytics company Refinitiv in January. 

Results for the year prior to the acquisition proved broadly in line with City expectations, although management forecasts for mid-single-digit cost growth over 2021 was higher than expected. 

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LSE shares fell as much as 12% in UK trading, having gained more than 15% over the last year. The gain compares to an almost unchanged move for the broader FTSE 100 index.

Likely investment costs to transform and integrate Refinitiv appeared to lay behind the cost guidance disappointment. 

Refinitiv serves over 40,000 customer institutions and 400,000 end users across 190 countries. LSE’s FTSE Russell stock indexes business and other information services will now be moved into a newly formed data and analytics division. 

Financial targets for the combined companies were largely re-confirmed, with adjusted earnings per share accretion after the first year of completion expected to be over 30% and increasing in years two and three. 

The acquisition of Refinitiv moves the centre of gravity at LSE away from trading operations and towards data provision. 

LSE revenues for 2020 grew by 3% to £2.12 billion, helping adjusted operating profit to grow by 5% to £1.1 billion. Revenues for its post trade business rose by 7%, aided by record activity in foreign exchange and cash equity clearing. Index data related revenues rose by 3%. 

There's also a 7% increase in the full-year dividend to 75p per share. Shareholders will be paid on 26 May.

Earlier in the week, the chancellor in his annual Budget flagged a major potential change in the way companies could list on the UK’s stock market under plans to head off competition from Europe and boost the appeal to corporations of going public. 

• Rishi Sunak’s Budget could turbocharge UK’s IPO market

ii view:

An ultra-low interest rate environment pushing investors away from cash and into other assets looks to provide a supportive backdrop. The explosion of data across all sectors of society, and including financial services, also looks to play into its favour. 

For investors, a 90%-plus gain in the share price over the course of 2019, following an attempted takeover of the LSE itself by the Hong Kong Exchange, underwrote a significant re-rating. Now, an estimated price/earnings ratio comfortably above the three-and 10-year averages means the shares do not not look cheap. 

That said, interest from Asia and prior consolidation of exchanges appeared to underline the significant of key exchange businesses. The LSE is today a global business and the acquisition of Refinitiv offers potential for significant cost saving opportunities, while stressing the importance of data and its value to the modern world. Although its dividend is not particularly generous, ongoing annual growth in the payout is not to be overlooked. For now, while some further price consolidation could be seen as it integrates Refinitiv, long-term momentum appears to remain in the company’s favour. 

Positives: 

• Product and geographical diversity
• Refinitiv cost synergies 

Negatives:

• Heightened valuation
• Factors outside of its control such as macroeconomic uncertainty can hinder performance

The average rating of stock market analysts:

Cautious buy