The LSE rewards shareholders with £750mn buyback

The London Stock Exchange (LSEG) is a markedly different animal to the one that existed pre-Refinitiv. The $27bn (£22.3bn) acquisition had its detractors, but it certainly expanded the number of potential revenue streams for the LSE, not least of which in the fixed income space, while also providing cross-selling opportunities for FTSE Russell data products.

The common thread among critics of the deal centred on the potential costs involved in integrating the businesses. The group’s latest figures provide a degree of reassurance on that point. Cost-cutting exercises generally involve some front-loaded costs of their own, and this is playing out with the LSE’s integration programme. However, it has already eclipsed the savings target for 2022 during the period under review and it remains on track to deliver at least £400mn in annual run-rate savings by the end of 2025.

The Refinitiv integration is noticeable elsewhere. Excluding discontinued operations, operating costs rose by £192mn to £1.59bn, although this was partly attributable to a strengthening greenback as 48 per cent of costs are recognised in US dollars. And there were also increased non-cash charges linked to depreciation and amortisation, along with a relatively modest rise in net financing.

These material aspects were predictable, unlike the £23mn hit due to actions taken in response to Russia’s invasion of Ukraine. Excluding the conflict, capital market revenue increased by 13.4 per cent. A dearth of primary issues remains a cause for concern, although increased volatility has supported secondary market activity. The situation in Ukraine also weighed on performance in the data & analytics division, which now accounts for around two-thirds of total income, yet four of the five business strands delivered solid revenue growth.

The upshot is that the LSE delivered an operating profit of £897mn, against £550mn in HY 2021. The interim numbers edged consensus forecasts, but shareholders would have been just as pleased with news that the LSE is to hand £750mn back to them via a share buyback over the next 12-months.

In Septemer 2021, we set out the bearish case for the LSE when it was trading at 8,054p a share. The shares subsequently dipped below 6,500p apiece, but have recovered in the interim. The integration of Refinitiv is progressing better than might have been expected given wider issues. And although the deal and the resultant £34.6bn in intangibles leaves the LSE ripe for potential writedowns, it would be churlish not to acknowledge the progress made over the past year. Even so, the forward consensus rating of 27 times forecast earnings is more in keeping with a tech stock. Hold.  

Last IC View: Hold, 6,794p, 3 Mar 2022