London Stock Exchange Group: Trading and Banking Turnaround Fully Established; Shares Undervalued

Wide-moat London Stock Exchange Group LSEG posted a good trading update with total income growing 7.5% to GBP 2,007 million roughly in line with GBP 1,980 million consensus estimate collected by the exchange group prior to the release. Continued good performance in the data and analytics segment (up 7.8% excluding Russia/Ukraine impact) and strong growth in posttrade (up 16.8%) on heightened market volatility in the quarter are noteworthy. The trading and banking solutions, respectively growing 2.6% and 3.1% organically, have now firmly established a growth trajectory. The supposedly bleak outlook of these business units has been one major argument brought forward by bears on LSEG for why the Refinitiv deal was ill-advised. We have continuously highlighted that although the transformation toward growth will not happen overnight, we believe that LSEG is well positioned to compete effectively in trading and banking. As LSEG continues to execute on its strategy, we see arguments justifying the discrepancy between LSEG’s share price and our fair value estimate of GBX 9,800 per share dwindling. Shares remain undervalued. Our fair value estimate remains unchanged.

The data and analytics business also benefited from continued demand for its real-time data business (up 6.4%) and strong growth in analytics solutions for benchmark rates and indexes (up 14.1%) more than offsetting lower asset-based revenues (down 12.4%) owed to lower market values.

Capital markets had a more challenging quarter as low activity in both primary and secondary equity markets weighed on equity capital markets (down 11.6%). However, Tradeweb continued to perform well across rates, credit, and money markets, offsetting the weakness in equity capital markets.

Heightened market volatility helped OTC derivatives (up 27.0%) while higher collateral balances (up 15.8%) lifted net treasury income (up 20.5%).