Will a new government spawn a new era for Britain’s stock market? Only time will tell but, for London Stock Exchange Group, the future looks bright.
The company that runs the London market has evolved into a data and analytics business rather than merely an exchange. David Schwimmer, the New Yorker who has been its chief executive since 2018, has transformed the group. Within a year he abandoned the idea to merge with other exchanges and instead instigated the £20 billion takeover of Refinitiv, the data analytics provider. The deal was completed in 2021.
This has been transformational for the business. While it once relied on transaction volumes and the health of the flotations market, it now makes most of its top line from data. This is the largest of London Stock Exchange Group’s divisions, covering its investment solutions and indices and accounting for just over half its top line. Then there is capital markets, where it provides a venue for companies to raise or transfer capital through issuance and secondary market trading for stocks. Finally, there is the post-trade business, which covers areas such as risk management and regulatory reporting solutions.
Under the hood, the company has built an impressive set of fundamentals. More than 70 per cent of its revenues are recurring, typically on a 12 to 24-month contract, which gives investors a good level of visibility on future profits. Meanwhile, its profit margin is north of 40 per cent. This has drawn in quality-focused investors, including the likes of Nick Train, who owns just over 4 per cent of the business through his Lindsell Train firm.
London Stock Exchange Group’s new model has proved a hit with investors, the shares have risen by more than 20 per cent in the past three years, but the Refinitiv deal did come with some downsides. The group offered some of its own stock as payment, which meant shareholders such as Blackstone and Thomson Reuters ended up with a 37 per cent stake in the parent business.
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Big chunks of this have been sold off through placements to institutional investors and offers to retail investors and London Stock Exchange Group has bought some of the shares itself. Analysts believe that this overhang has hindered progress in the share price, but Blackstone’s stake now stands at less than 2 per cent, much smaller than it was.
The shares also have suffered this year as the company reported a hit to its annual subscription value, which slowed from 6.7 per cent growth in the final quarter of last year to 6 per cent in the first quarter. This was partly because of the collapse of Credit Suisse and a discount on an agreement with a leading unnamed bank, although the exchange has insisted that the latter will help to drive growth next year and beyond.
London Stock Exchange Group’s partnership with Microsoft will be key to its growth. The American technology powerhouse took a 4 per cent stake in the British business in 2022 as part of a decade-long “strategic partnership”. The companies are working together to embed London Stock Exchange Group data into Microsoft Teams and its suite of Office 365 software. Investors do not expect this to feed through to revenues until 2025, when analysts at Bank of America believe adjusted earnings per share growth could accelerate to 12.2 per cent, compared with an expected rate of 9.8 per cent for the 2024 financial year.
The shares trade at a forward price-to-earnings multiple of 26.2, by no means cheap but not out of step with a sector average of 27. This compares with a multiple of 25.6 at the New York-listed FactSet Research Systems, as well as MSCI at 33.4. Given London Stock Exchange Group’s long runway for growth, dwindling overhang from the Refinitiv deal and an already robust set of fundamentals, this looks like a fair trade.
Advice Buy
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Why High-quality growth at a discount to its peers
Henderson Far East Income
Investors need not look far for income, with the FTSE 100 expected to yield 4 per cent over the next 12 months, but, given that the £391 million Henderson Far East Income trust boasts a double-digit yield, they may be tempted to look further afield.
The trust invests throughout the Asia Pacific region, looking for companies that can grow its shareholders’ capital and provide them with a high income.
Its top holding as of the end of May was in Taiwan Semiconductor Manufacturing, at 5.2 per cent of its assets. This was followed by Samsung Electronics, at 3.9 per cent, and MediaTek, another Taiwanese chip company, at 3.5 per cent. Its single biggest geographical focus is China, where just over a fifth of its portfolio is invested. This is followed by Taiwan, at 17 per cent, and Australia, at 14 per cent.
The trust’s focus on higher yields has hit its performance in recent years. Last year the fund lost 13 per cent. It does not have a formal benchmark, but the MSCI Asia Pacific index rose by 14 per cent in the same period. In recent months it has taken a relatively more cautious approach, with its managers saying in November that it would be more open to targeting stocks that had lower yields but could offer other forms of growth. So far this year, it has returned an impressive 20 per cent, thanks in part to a wider rise in Asian stock markets on the back of some weakness in the US dollar.
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The dividend yield alone may be enough for some investors, but the fund does not come cheap. It reports a charge of 0.97 per cent, against an average of 0.91 per cent among rival investment trusts in the Asia Pacific equity income sector. The shares also trade at 3 per cent premium to their net asset value, compared with a 12-month average of a 1.7 per cent discount and a 6 per cent discount in its sector.
Advice Hold
Why Attractive yield but shares more expensive than usual
lauren.almeida@thetimes.co.uk
