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LSE & Schroders: all things to all people

Two of the City’s most storied firms are no longer just investments in UK markets
LSE & Schroders: all things to all people
  • LSE publishes last results prior to Refinitv deal completion
  • Shares nearly five times as expensive as Schroders on an EV/EBITDA basis
IC TIP: Hold

The beauty - if one can call it that – of London Stock Exchange’s (LSEG) business model is that neither movements in asset prices nor the direction of capital flows determine the City giant’s profits. Rather, it is markets activity writ large – clearing work, capital raising, multi-asset trading, the passive revolution and so on – that drives the bottom line.

Last year’s frenetic activity may ultimately prove atypical or a new dawn. Following the completion of the acquisition of financial data provider Refinitiv in January, it will be hard to tell come interim results. Yet the underlying signs were strong, and despite the mass migration to home working, each of the LSE’s core divisions saw revenue growth in 2020.

Even now, chief executive David Schwimmer believes the LSE group – or “El-Seg”, as the East Coast native calls it – can be all things to all people. If equity markets nosedive again, this will hurt fees earned on the Russell passive index business, but bump up transaction volumes and margin levels at LCH, the group’s majority-owned clearing house.

Neither is he fazed by Amsterdam’s newly-won status as the share-dealing capital of Europe, given that volumes have stayed on the group’s Turquoise trading platform. Fingers crossed an agreement can be struck for derivatives and interest rate swaps.

Schwimmer also welcomed the Hill Review if it can help to win companies “tempted to go elsewhere”, including the somewhat controversial use of SPACs (special purpose acquisition companies), even as he noted “froth in the US market” for the blank-cheque vehicles. Then again, and odd as it may seem for a group so intertwined with the history of UK listing rules, the breadth of the post-Refinitiv LSEG means IPOs are no longer the driver they once were.

Like LSEG, investment management giant Schroders (SDR) can also point to centuries of history, as well as remarkably similar levels of revenue and profits. Reflecting its steady, family-owned approach to long-term capital management, it has also accrued a large net cash position, giving it an enterprise value to cash profits ratio of just over seven, compared to a multiple of around 36 for LSE shares – an all-time high, according to FactSet.

Schroders is also “very supportive” of the Hill Review, says chief financial officer Richard Keers. “If UK rules had been more flexible, we would have had more innovative companies listing here, and that would have given asset managers opportunities,” he told us, in a nod to the outsize returns that have defined US markets over the past decade.

Where the investment manager differs is in its position in the financial food chain. While LSEG owns the building, fixtures and fittings and runs the utilities, Schroders is just one of its many tenants.

Yet it is still a productive and profitable one. In 2020, a dip in margins was offset by strong distribution efforts and benchmark-beating investments. Assets under administration jumped 15 per cent to £574bn, as the group’s fund managers returned 6 per cent against opening investments and net client inflows added £55bn, including £12.4bn from international joint ventures, largely in India and China.

Compare this to Rathbone Brothers (RAT), another City stalwart that has been managing money for more than a century. Given the circumstances, the group’s 4 per cent increase in underlying pre-tax profit in 2020 was a resilient enough performance, though an entirely UK focus still points to a hard trade-off between sluggish growth and margin pressure.

Indeed, the re-pricing of £5.1bn of funds onboarded from the acquisition of Speirs & Jeffrey – the effect of which was to lift fee margin by 2 basis points – feels like a short-term win for the investment management business, which saw flat net client inflows in the period. Group-wide net inflows of £2.1bn were either acquired or in lower-margin funds mandates.

Analysts at Jefferies lifted its target on the stock to 1,880p (from a current share price of 1,628p), though long-term free cash flow growth forecasts – fading to 3 per cent over a decade – highlight the broader challenge for a domestic-focused wealth manager.

By contrast, the international focus of both LSEG and Schroders is a bull point. Indeed, alongside digitalisation, the geographic depth of the Refinitiv deal and the perennial takeover interest in the business have been key to the doubling in LSEG’s shares since we flagged them as one of our best ideas two years ago (4,040p, 3 January 2019). Now priced at 35 times’ this year’s consensus earnings, the market is asking a lot from cost synergies.

On the face of it, Schroders is a simpler business whose brand, heritage and fund management credentials must substitute for the economic moats that define a market infrastructure group like the LSEG. Recent evidence suggests it is doing all of this well, even if its steady approach cannot match the newsiness, excitement and big-time vision of Paternoster Square. Throw in an undervalued balance sheet, and Schroders remains our pick of the bunch.

Last IC View: Hold, 8,854p, 17 Dec 2020 (LSEG), Buy, 2,959p, 30 Jul 2020 (SDR)

LONDON STOCK EXCHANGE (LSE)  
ORD PRICE:9,028pMARKET VALUE:£50.2bn
TOUCH:9,022-9,030p12-MONTH HIGH:10,010pLOW: 5,300p
DIVIDEND YIELD:0.8%PE RATIO:75
NET ASSET VALUE:668p*NET DEBT:4%
Year to 31 DecTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20161.5236443.543.2
20171.7756414651.6
20181.9168513860.4
20192.0665112070.0
20202.1268512075.0
% change+3+5+1+7
Ex-div:29 Apr   
Payment:26 May   
*Includes intangible assets of £4.3bn, or 778p per share.
SCHRODERS (SDR)   
ORD PRICE:3,482pMARKET VALUE:£9.84bn
TOUCH:3,482-3,485p12-MONTH HIGH:3,654pLOW: 1,711p
DIVIDEND YIELD:3.3%PE RATIO:20
NET ASSET VALUE:1,446p*NET CASH:£3.1bn
Year to 31 DecTurnover (£bn)   Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20162.1461817893
20172.51760216113
20182.63650183114
20192.54625179114
20202.51611172114
% change-1-2-4 
Ex-div:25 Mar   
Payment:06 May   
*Includes intangible assets of £1.2bn, or 428p per share.