London Stock Exchange reaps the rewards

No trees were pulled up in half-year results for London Stock Exchange (LSEG) as the exchange and market information company largely delivered on what City analysts had forecast. A fall in pre-tax profit was largely technical as favourable exchange rates reversed course and a change in tax rates also reduced the bottom line by 18 per cent year on year. However, management now expects that its full-year results will see total income growth come in at the top of management’s 6-8 per cent range. The market seemed pleased enough to take profits on results day on a share price that has crept steadily higher over the past year. LSE also expects to distribute a further £750mn of capital in share buybacks by April 2024, £400mn of which was completed during the half.

The company, which is as much a market information provider as an exchange after its merger with Refinitiv, saw both the value and volume of subscription sales increase during the half by as much as 6.9 per cent when price rises are included. This was slightly behind growth this time last year, but the new growth is made up of a higher proportion of new subscriptions that take longer to mature.

The company has also been acquiring since the beginning of the year and added automated clearing business Acadia to the group for $705mn (£570mn), which was a matter of upgrading LSE’s existing 14 per cent stake in the business. LSE continues to generate high levels of cash flow and operating cash flow of £1.25bn in the half was split between £380mn of “business as usual” capex – i.e. Keeping the lights on. Total capex for the half was £488mn, with the excess related to integration costs related to the Refinitiv merger. Around 72 per cent of the combined group’s is now recurring in nature, compared with just 40 per cent in 2020.

Management seemed pleased enough with the results to change the company’s leverage policy by upping the ratio of net debt to cash profits from its current level of 1-2 times to 1.5-2.5 times, on the basis that the Refinitiv merger has generated higher levels of recurring cash flow.

The merger is clearly still costing money in terms of capex, but LSEG has achieved a certainty of predictable revenues and can carry the risk. This is reflected in a full looking consensus price/earnings ratio of 24 for 2023. Hold.

Last IC view: Hold, 7,356p, 2 Mar 2023