Thursday, February 22, 2024

London Stock Exchange: Tech Giant Hiding in Plain Sight?

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From thwarted plots by activists to concerns about Britain’s beleaguered stock markets, the London Stock Exchange Group (LSEG) is frequently in the news.

As a listed company in its own right, however, it appears to be thriving. Shares in the company carry a 3-star Morningstar rating, and have risen 92.79% to £88.26 in the last five years. 

In addition, the British business has produced a cumulative return rate of over 95.89% over that same period, outpacing the Morningstar UK Index, which only returned 25.40%. Morningstar analysts maintain the company is undervalued, based on their Fair Value Estimate of £90.08.

Why Do Fund Managers Love LSEG Stock?

LSEG is beloved of several high-profile fund managers. And that’s despite moments of caution.

UK fund house Lindsell Train is LSEG’s largest backer, and owns the company in both the Finsbury Growth & Income Trust (FGT), the Lindsell Train Investment Trust (LTI) and the WS Lindsell Train UK Equity fund. The company occupies 12.60%, 11.10%, and 9.88% of each portfolio, respectively.

In founder and portfolio manager Nick Train’s latest commentary for the Lindsell Train UK Equity fund he points to LSEG’s shares trading below previous heights in February 2021 of £98.56.

He says investors were understandably cautious after LSEG completed its transformational acquisition of data giant Refinitiv for around $27 billion (£21.4 billion). Their concerns included a worry that they would have to “digest” billions of pounds of LSEG shares because Refinitiv’s former owners were slowly selling theirs off, but also centred around the UK’s image as a marketplace for the tame.

Neither has hampered LSEG’s performance, however.

“Despite all this, LSEG’s shares rose 32% in 2023. The merger has gone well; the consortium has successfully disposed of most of its shares and the London Stock Exchange itself now amounts to less than 4% of the revenues of the parent,” Train says.

“Meanwhile, a group has been created that is the biggest provider of real-time financial data in the world. LSEG is now a globally significant provider of data, clearing and liquidity to financial institutions”.

LSEG: Perception vs Reality

Train is not alone in his optimism.

Matt Evans is the lead portfolio manager on Ninety One’s UK Sustainable Equity fund, which holds LSEG as 5.8% of its portfolio. He points to the LSEG’s recent partnership with Microsoft as a decent play on the rise of artificial intelligence (AI).

In 2022, Microsoft bought a 4% stake in LSEG, securing a board seat in a 10-year strategic partnership with the London-based firm, with the aim of building bespoke generative AI models.  

“One of the opportunities for LSEG with the breadth of their data set now and the depth of it, is to utilise AI to give great tools to customers to really get more out of the datasets,” he says. 

“And if you link that to the recently announced partnership with Microsoft, one of the best developers of software, you have got a credible proposition that will allow LSE and Refinitiv to become one of the leading players in this space”.

But Evans cites image as a problem too. Indeed, he agrees the Group has battled with companies’ reluctance to go public in London. In a 2023 survey of small- to mid-cap companies, for instance, the Quoted Companies Alliance found one in four companies saw no advantage to being listed in London whatsoever.

This continued to play out in 2023, which brought a growing list of firms looking to take their chances on Wall Street instead of the once-totemic English capital, with businesses from Arm to YouGov taking or considering the leap across the pond.

But Evans is unphased by this, and backs LSEG because he feels it’s able to sell the benefits of a London float to potential listers.

“There is a real importance of highlighting some of the benefits that London can provide. Access to capital is important, our governance standards are higher although there are questions about how those should be implemented,” he says.

“But it is a real benefit to investors to have companies listed in London and that can be really beneficial for the whole ecosystem of corporate PLCs to be able to access that through the LSE”.

He adds UK data businesses like RELX (REL) and Experian (EXPN) – themselves listed in London – are global businesses that have not been held back. And the LSE’s capital markets division will remain profitable even if it is a smaller contributor to the wider Group’s revenues.

Key Morningstar Metrics for LSEG Stock:

• Fair Value Estimate: £90.08
• Morningstar Rating: 
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Want to know more? Read more about our Fair Value Estimates, Morningstar Ratings, the Morningstar Economic Moat Rating, and the Morningstar Uncertainty Rating

What Obstacles Does LSEG Face?

Niklas Kammer, Morningstar equity analyst, says LSEG could face several obstacles.  

“Wide margins and opaque pricing practices by index providers could intensify oversight in the future,” he says.

“Turning the Refinitiv acquisition into a success could prove much harder than anticipated [so it] could end up being the tail that wags the dog, as LSEG is now much more reliant on data and distribution than exchange-driven revenue compared with peers”.

Despite this, Artemis Income fund manager Nick Shenton, for whom LSEG is 4.3% of his overall portfolio, is still happy. As capital flows away from London, he can see the challenge, but still considers the business one ripe with opportunity. 

“What we are saying is that there is an opportunity for shareholders in the LSEG because the perception does not match the reality. The reality is that it is overwhelmingly the beneficiary of technology itself,” he says.

“We are constantly looking globally to learn about business and that is very much the way LSEG is being piloted. It truly is a very global strong technology business hiding in plain sight”.

Bulls Say

LSEG is a fully-integrated financial exchange with core assets along the financial markets value chain.

Bears Say

Wide margins and opaque pricing practices by index providers could intensify regulatory oversight in future.

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