London Stock Exchange shares are hugely undervalued

A recent slump in share price offers an “attractive entry point” for investors wanting exposure to one of the world’s great stock exchanges, argues this analyst.

A forecast 25% upside for London Stock Exchange (LSE:LSEG) shares today provided some cheer for portfolio manager Nick Train and followers of his Finsbury Growth & Income (LSE:FGT) investment trust.

LSE, which is the fourth-largest holding in the investment trust’s portfolio, surged to the top of the FTSE 100 index after UBS published its “buy” note and price target of 8,500p.

The Swiss bank said a 20% fall for shares since April to as low as 6,400p opened up an “attractive entry point” for a company whose operating performance has shown improvement in recent quarters.

UBS said today: “We argue LSE shares have about 25% upside from current levels as the stock trades at the lower end of its 15-month trading range.”

Finsbury last month reported its third consecutive sixth-month period of disappointing returns, with LSE’s reversal from almost 10,000p in January 2021 one of the factors.

Lindsell Train is among the London Stock Exchange’s largest shareholders with a 4.4% stake, accounting for about 10% of the Finsbury portfolio at the end of May.

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In a recent investor fact sheet, Train said LSE and other major positions in Diageo (LSE:DGE) and RELX (LSE:REL) were down between 6% and 8% in May “for no discernible reason”.

He said: “Of course, I acknowledge, the backdrop for all equity markets is unpropitious today. But I might hope that predictable, cash-generative businesses, like this trio, would’ve been havens in uncertain times.”

LSE’s decline in May unwound the previous month’s rally to 8,504p, when the exchange finally looked to have shaken off the integration uncertainty caused by its $27 billion (£22.4 billion) acquisition of financial data firm Refinitiv in January 2021.

The deal created the world’s second-largest provider of data and analytics to the financial sector and leading provider of clearing in interest rates and FX. It also part owns Nasdaq-listed Tradeweb (NASDAQ:TW), a trading venue for rates, ETFs, equities and money markets.

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Commenting in April following LSE’s first-quarter results, Train said the rationale for the deal looked “ever more compelling”. He added that “we’re happy for this to remain a major holding as the Refinitiv assets bed in and the company continues to transform.”

His confidence is shared by UBS analysts, who said sentiment towards LSE’s management had improved in recent quarters after revenue growth above 5% in each of the past three quarters.

Today’s note points out that LSE is positively geared to interest rate and FX volatility via Tradeweb, LCH and FXall and should generate 9% earnings annual growth over 2021-24 due to cost synergy and deleveraging opportunities.

Strengthening currency tailwinds also boosted UBS’s estimates by up to 2% today. About 75% of LSE’s earnings were generated in the US dollar in 2021, resulting in a lift once sterling’s 10% year-on-year fall in the current quarter is taken into account.

One downside risk flagged by UBS is January’s expiry of the first of three annual lockups on about £15 billion of LSE shares owned by Blackstone and Thomson Reuters.