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Bargain-priced London is one of the most targeted markets in the world. Activists (and acquisitive predators) are drawn to its undervalued, underperforming companies and encouraged by its openness and absence of strong local competition.
Activist investors typically don’t want to buy their target, preferring to extract locked-away value then walk away. Many are uncompromising and American, though the activist on medical devices maker Smith & Nephew’s register is Swiss firm Cevian Capital. But all share a determination to push slack management teams to deliver better returns.
Often the activist strategy will be to demand that surplus cash is dished out or used on buybacks; for parts of the business to be sold or for the listing to be switched to New York to drive up the share price. They can stay for years and may take seats on the board, as Nelson Peltz of Trian has done at Unilever.
A steep share price fall can trigger a bout of activism. That’s been the case at Greggs and at London Stock Exchange Group, whose exceptional performance since it transformed into a data business has come unstuck over the AI threat to its business model.
Its activist Elliott is no stranger to the UK market, with previous campaigns at BP and GSK. Blue Whale Growth fund manager Stephen Yiu says the key question is whether LSEG’s moat remains intact or whether the current management team has simply underdelivered on the group’s true potential.
“If it is the latter, we welcome Elliott’s involvement in driving change from the top and would support pressure on management to sharpen execution, improve margins in the core business and enhance capital allocation, including via further share buybacks or the disposal of non-core‑assets.”
LSEG is upping its buyback target in response to pressure from the activist. Whether that will be enough remains to be seen.
BUY: London Stock Exchange Group (LSEG)
The London Stock Exchange Group has announced a big increase in its dividend and an expanded share buyback programme, writes Arthur Sants.
The financial data analytics company has performed well in the past year, but its shares have sold off, possibly in response to AI disruption fears. Management is using this as an opportunity to buy back stock.
LSEG owns a lot of proprietary data which its customers will still need to purchase. This year, it signed deals with AI companies Anthropic, Databricks, Microsoft, OpenAI and Snowflake to give them access to its licensed data.
The stock’s sell-off this year combined with its growing cash flow means it now looks like a value stock. Since the start of last year, its free cash flow yield has risen from 3 per cent to 6 per cent. That’s good value for a company increasing profits at a double-digit rate.
BUY: Johnson Service Group (JSG)
Johnson Service Group updated the market on its trading activities in January, so there were few revelations in the group’s full-year figures, but shareholders will be pleased with the 20 per cent increase in the annual dividend, writes Mark Robinson.
The textile rental group reported a 16.4 per cent increase in adjusted operating profits to £72.5mn on a 140 basis point rise in the related margin to 13.5 per cent.
Investec expects adjusted earnings per share of 14.4p, rising to 15.5p in 2027.
Net debt is up, but the leverage multiple stands at a manageable 0.95 times. The company has had to contend with higher costs for labour and premises. Energy costs have been falling, although events in the Middle East are likely to lead to increases. Nonetheless, shareholder returns support the investment case.
HOLD: Greggs (GRG)
For the Greggs board, “a highlight of the year was the Greggs sausage roll establishing its status as a British icon”, writes Erin Withey.
There were few other highlights in results where full-year pre-tax profit slumped by almost a fifth.
Slowing like-for-like sales growth didn’t help, as customer footfall was hit by a particularly hot summer. The group reported like-for-like sales growth of 2.4 per cent — less than half the figure for the previous year.
While it hopes inflationary pressures will ease, Greggs highlighted price rises as one way to offset higher costs. But some analysts are not convinced this will move the needle.
With the shares trading on 13 times earnings, Peel Hunt sees this as still “too rich” given the limited growth expected from the London market’s most shorted stock. We agree.