ii view: LSE cracking on with 'transformational' acquisition

The LSE continues to prosper, but there's a lot of good news already in the price. 

Third-quarter trading update

• Total income up 12% to £587 million
• Nine-month year-to-date total income up 9% to £1.73 billion
• Proposed acquisition of Refinitiv continues to progress

Chief executive David Schwimmer said:

"The group continues to perform well and has delivered a strong Q3 performance. LCH's OTC clearing services saw continued strong volumes during the period in both member and client clearing.  In Information Services, FTSE Russell reported 10% growth as subscription revenues remained strong.  Capital Markets also produced a good overall performance against a backdrop of continued challenging market conditions.

"During the quarter, we announced the proposed acquisition of Refinitiv, a leading global provider of data, analytics and financial markets solutions.  This is a transformational transaction that accelerates our group's strategy, positioning us in key areas of future growth as a global financial markets infrastructure leader. Together, we will create a multi-asset class capital markets business and bring world class data content, management and distribution capabilities to our customers on an open access basis.  The transaction offers substantial strategic and financial benefits to our shareholders, customers, employees and other stakeholders."

ii round-up:

Global financial markets infrastructure business, London Stock Exchange Group (LSE:LSE), reported trading metrics at the upper end of analyst forecasts in this third-quarter trading update. 

LSE, which recently saw the Hong Kong Stock Exchange and owner of the London Metal Exchange ditch a takeover bid for it, reported a 12% jump in total group income to £587 million. 

Its Post Trade London business - things like clearing, settlement and risk management - led the way. Income rose by 19% driven by interest rate swap flows and growth in net treasury income. 

The Capital Markets division posted a 14% revenue increase, aided by fixed income trading, while its biggest business by revenues at over 40% enjoyed a 9% revenue hike, pushed higher by subscription payments for its FTSE Russell indices. 

The share price rose by just over 1% in midday UK stock market trading.

The company's proposed acquisition of Refinitiv, a fellow provider of financial data and market infrastructure, was said to be progressing. Together, LSEG and Refinitiv will be the largest listed global financial markets infrastructure provider by revenue. Refinitiv serves over 40,000 customer institutions.  

LSEG also announced the pending departure of its chief financial officer David Warren, who is set to step down from duties at the end of 2020. 

ii view:

LSE's journey to become an international financial markets infrastructure business began in 2007 when it combined with the Milan Stock Exchange. The successful acquisition of Refinitiv will see it achieving its ambition to become a global financial markets infrastructure leader.

An ultra-low interest rate environment pushing investors away from cash and into other assets looks to provide a supportive backdrop. The explosion of data across all sectors of society and including financial services also appears favourable. 

For investors, an attempted takeover by the Hong Kong Exchange underlines the potential for yet further industry consolidation. However, a 70%-plus gain in the share price year-to-date leaves the forward price/earnings (PE) ratio comfortably ahead of its 3 and 10-year averages, providing grounds for some investor caution. 

Positives: 

• Product and geographical diversity
• New product development and investment in opportunities continues across the business

Negatives:

• Additional acquisitions could see government regulators taking an interest
• Factors outside of its control such as macroeconomic uncertainty can hinder performance

The average rating of stock market analysts:

Buy