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Deflating balloons release stale air. Pumped-up expectations for the London Stock Exchange Group’s takeover of data behemoth Refinitiv dissipated earlier this year over concerns about integration costs. These are now the main focus of investors. Better than expected first-half results released on Friday give bulls hope that the LSE can recover its high valuation multiple. That looks premature.
Listed stock exchanges used to provide a levered bet on capital market activity. LSE and peers then moved partially to a data subscription business model.
The Refinitiv deal announced in 2019 was supposed to be the crowning achievement in a string of deals that took the company deep into indices and clearing. But in the last year LSE shares, down single digits, have trailed the soaring equity market benchmarks to which it sells access. Its forward price/earnings ratio has dipped to 27 times, according to S&P Capital. US listed data provider IHS Markit trades 10 points higher.
“Data begets data’‘ quipped an optimistic LSE boss David Schwimmer on the day. He expects LSE’s data analytics top line to expand as market transactions create more data points. Telecom companies have said similar things in the past, yet suffered deflating earnings valuations. Of late, the market has had low hopes for LSE. Adjusted ebitda of £1.66bn beat forecasts by only 5 per cent and boosted the share price almost as much.
On the plus side, Schwimmer addressed concerns about disclosure and guidance, notes Citi’s Andrew Coombs. LSE provided a peek at profitability by unit, revealing that data analytics had an ebitda margin above 47 per cent.
This is below the group’s margin but better than some feared. Operating costs also fell significantly year on year. So much so that LSE has upped its run rate for cost cutting this year without changing any medium-term aims.
Meeting cost targets alone will not reflate LSE’s valuation multiple. Proof that the data analytics business can drive faster top-line growth would do the trick. This is the data Schwimmer himself needs to beget.
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