- LSEG has a number of competitive advantages, argues the manager
- The company is almost rid of Refinitiv’s private equity owners
Emily Barnard, deputy portfolio manager at Edinburgh Investment Trust (EDIN), explains why the trust invests in London Stock Exchange Group (LSEG):
“London Stock Exchange Group has transformed itself from a traditional exchange operator into a global financial markets infrastructure and data powerhouse. This shift has positioned LSEG as a compelling long-term investment, with high-quality recurring revenue streams (72 per cent of revenue in 2023) underpinning organic revenue growth in the mid-to-high single digits, at high incremental margins. This has resulted in superb levels of cash generation, which has been put to work via a dividend increase and share buybacks.
“LSEG completed the acquisition of data and analytics provider Refinitiv in 2021, which made it a broader player in the field of financial data. This transaction resulted in a number of private equity companies coming onto the share register (the Blackstone consortium). The consortium has been exiting its position in LSEG via share placings, which has acted as an overhang on the shares. But this artificial cap on the share price has now been eliminated – the consortium’s holdings were under 2 per cent as of mid-2024. LSEG cleverly sped up the process by directing share buybacks towards the consortium.
“The cash generation power of the business is now set to accelerate, and we see scope for further dividends or share buybacks. LSEG has a number of enduring competitive advantages, which we believe will support strong organic growth for many years to come. Its end-to-end data coverage, which spans the entire trade life cycle, enables the company to offer expanded data solutions. It is deeply embedded in customer workflows, which leads to stronger client retention and pricing power. The company has become a key strategic partner for its customers.
“LSEG also benefits from a structural trend we see in other industries – companies creating more value for customers by adding intelligence, analytics and AI to their data products and services. Its analytics and AI capabilities add value for its customers, and in turn this revenue is ‘stickier’ for LSEG, giving investors greater visibility over the path of future revenue growth.
“The partnership with Microsoft, established in 2022, is another one of the company’s strengths. The collaboration involves using Microsoft’s cloud infrastructure and co-developing AI-enhanced products. This combination of LSEG’s deep expertise in financial markets and Microsoft’s product development capabilities will help drive strong organic growth.
“Of course, as an investor, it is not solely about the business fundamentals – one also has to pay the right price for them. While the company has seen an expansion in its valuation metrics (alongside peers), this is in the context of an improving organic growth trend, margin expansion and a greater scope for cash returns to shareholders.”
As of 30 September 2024, London Stock Exchange Group accounted for 3.5 per cent of the Edinburgh Investment Trust’s portfolio.