London Stock Exchange Group (LSE) continues to gain from its strategy to diversify its business and gain exposure to growth opportunities through acquisition. The expected sale of the Russell Investment Management business has been announced and should complete in H116. In H115, it benefited from its acquisition of the Russell index business and organic growth in its other activities, especially at LCH.Clearnet’s SwapClear. LSE has identified more future revenue and cost-saving opportunities from its businesses. Its shares are trading in line with international peers on a P/E basis, but the yield is substantially lower. An update on LSE’s capital allocation and longer-term dividend policy is scheduled for March 2016.
The Russell Index business was successfully integrated with the existing FTSE index business in H115, and marked another positive acquisition for LSE. It has outlined plans to grow revenue at CC&G and LCH.Clearnet and cut costs at the latter, which should lead to profit growth. LSE continues to look for further acquisitions. Its observation that many of its clients, notably the asset managers and investment banks operate globally, but that market infrastructure companies such as the LSE are more regionally focused, could imply geographical expansion is on the agenda. If it does proceed with an acquisition, it would do so on the back of a successful track record.
LSE now has a collection of activities which are growing, profitable and generating cash. We anticipate that the announcement of capital allocation principles and longer-term dividend policy in March 2016 will reinforce LSE’s credentials as a company focused on generating shareholder value.
LSE’s 2015e and 2016e P/Es are in line with its global peers, but its yield is around half the average of this group. The anticipated new dividend policy could lead to higher dividend payments and close this gap. Our DCF valuation, which uses an 8.9% cost of capital, implies that the market is anticipating LSE to achieve a longterm growth rate of cash flows of 4.5% per year.