London Stock Exchange expects growth acceleration

The London Stock Exchange Group (LSEG) is positioning itself as a beneficiary of the data-driven, artificial intelligence (AI) future the big tech companies are hoping to build.

In 2022, Microsoft (US:MSFT) acquired a four per cent stake in LSEG and signed a 10-year partnership agreement. As part of the deal, LSEG would move its data and analytics to the Microsoft Azure cloud and give Microsoft users direct access. For example, embedding financial data into Microsoft Teams.

The first Microsoft products are now available, including plug-ins for Excel and generative-AI products for LSEG’s Workspace platform. LSEG said there is “a strong pipeline for 2025” and expect the rate of migration onto Azure to double this year.

This should help accelerate growth for LSEG’s data and analytics business. In the past year, organic constant currency revenue grew 4.5 per cent, while adjusted cash profit (Ebitda) was up 6.5 per cent. Data and analytics is now the most important part of the business, making up 47 per cent of the £8.4bn total revenue.

This shift to subscription data platform is why Emily Barnard, deputy portfolio manager at Edinburgh Investment Trust, is bullish on the stock, saying it is positioned “as a compelling long-term investment, with high-quality recurring revenue streams”.

The fastest growing part of LSEG’s business is capital markets, which grew 17.8 per cent to £1.8bn. This was driven by the strong performance of fixed income digital marketplace Tradeweb. The platform’s average daily volume increased 36.6 per cent, increasing revenue by 28.4 per cent. With interest rates now swinging more regularly, fixed income has become a more popular and widely traded asset class.

The combination of Tradeweb and the Microsoft deal means management is expecting revenue growth to accelerate next year to between 6.5 per cent and 7.5 per cent. As with any software business, increased scale improves margins. As a result, management is also guiding for the cash profit margin to rise between 50-100 basis points, to nearly 50 per cent.

Steady growth, recurring revenues and a high margins are all desirable in a business. As a result, LSEG is trading on an expensive forward P/E ratio of 27. But there are few businesses of this high quality out there. LSEG is good enough for Microsoft, and it is good enough for us. We stick to buy.

Last IC View: Buy, 9,840p, 1 Aug 2024