Is London Stock Exchange Group a good company?

The London Stock Exchange Group (LSEG) is a diversified global financial markets infrastructure and data company. It operates a range of international equity, bond and derivatives markets, including the London Stock Exchange. LSEG is a leading developer of high performance trading platforms and capital markets software for customers around the world. The Group also provides a wide range of information and analytics products and services to financial institutions, investors and companies.

Overview of LSEG

London Stock Exchange Group was formed in 2007 when London Stock Exchange merged with Borsa Italiana. LSEG has grown substantially through acquisitions in recent years, including Russell Investments in 2014, Frank Russell Company in 2015, Mergent in 2016, The Yield Book and Citi Fixed Income Indices in 2017, and Refinitiv in 2021.

As of 2022, LSEG has the following major divisions:

– Capital Markets: operates equity trading venues in Europe including London Stock Exchange and Borsa Italiana. It also operates bond trading platforms.

– Post Trade: provides clearing, settlement and custody services. Operates CC&G, Monte Titoli, LCH, UnaVista and GlobeSettle.

– Data & Analytics: provides financial markets data, analytics and indices under brands like FTSE Russell and Refinitiv.

– Technology: provides technology solutions for financial markets under brands like MillenniumIT.

LSEG has over 8,000 employees and is headquartered in London with main offices in New York, Rome, Paris, Amsterdam, Frankfurt, Hong Kong, Tokyo and other global cities. For the year ending December 2021, LSEG reported total income of £6.49 billion, adjusted EBITDA of £3.49 billion and profit before tax of £1.95 billion.

Business segments

Let’s take a closer look at LSEG’s major business segments:

Capital Markets

This division operates equity, bond and derivatives markets globally including:

– London Stock Exchange
– Borsa Italiana
– Turquoise
– CurveGlobal
– FTSE Russell indexes

The Capital Markets division provides primary and secondary equity and bond markets for companies to raise capital and invest. In 2021, total capital raised on LSEG’s markets was £151 billion.

Post Trade

Post trade provides critical clearing, settlement and custody services. Major brands include:

– LCH: clearing house that serves major international exchanges and platforms.
– CC&G: European clearing house.
– Monte Titoli: European settlement and custody.

In 2021, novated and cleared derivatives contract volumes reached all-time highs of 1.97 billion contracts across LSEG’s clearing houses.

Data & Analytics

LSEG provides data and analytics tools to financial market participants. Key brands include:

– Refinitiv: Leading provider of financial markets data, insight and analytics.
– FTSE Russell: Major global provider of benchmarks, analytics and data solutions.

The Refinitiv acquisition transforms LSEG into a global leader in data and analytics. Refinitiv has over 40,000 end customers.

Technology

LSEG develops high performance trading platforms and workflow software for financial markets. The main brand is:

– MillenniumIT: Develops trading platforms and fintech used by LSEG’s own markets as well as clients worldwide.

MillenniumIT technology powers over 200 market infrastructure organizations and capital markets firms in 55 countries.

Financial performance

LSEG has delivered strong financial results over the past 5 years:

Revenue and profitability increased substantially in 2021 following the transformational Refinitiv acquisition. LSEG has high margins with adjusted EBITDA margin over 50%. The company generates significant free cash flow to fund investments and acquisitions.

Industry outlook

LSEG operates in the global financial markets infrastructure and data industry. Key factors driving growth in this industry include:

– Increasing electronification of markets, driving demand for efficient trading platforms and workflow software.

– Need for greater transparency and risk management, increasing demand for data, analytics and benchmarks.

– Globalization requiring cross-border access to markets.

– Innovation in fintech and AI applications in financial services.

According to McKinsey, global capital markets revenue pools are projected to grow by 3.5-4.5% annually, reaching over $550 billion by 2023. This creates significant opportunities for LSEG across its business segments. The Refinitiv deal also provides access to the fast growing enterprise data management industry.

Competitive positioning

LSEG operates in a highly competitive industry alongside other exchange operators, data providers and fintech vendors. Its main global competitors include:

– Exchange operators: CME Group, IntercontinentalExchange, Deutsche Börse, ASX
– Data providers: Bloomberg, S&P Global, MSCI, Moody’s, FactSet
– Software vendors: FIS, Fiserv, Finastra

LSEG has a strong competitive position based on:

– Strong brands including London Stock Exchange with its capital raising franchise.
– Global footprint across key markets in Europe, North America and Asia.
– Diverse business mix spanning major industry segments.
– Blockbuster deal for Refinitiv transforms LSEG into a global data giant.
– Proven technology and innovation capabilities.
– High barriers to entry given regulatory requirements and technology integration.

The Refinitiv deal significantly strengthened LSEG’s capabilities and scale in data and analytics. LSEG has also invested heavily in growth areas like environmental, social and governance (ESG) data analytics.

Growth strategy

LSEG outlined its growth strategy and objectives at a Capital Markets Day in 2021. The strategy includes:

– Leveraging the transformational Refinitiv acquisition to become a leading global financial markets data and infrastructure provider.
– Investing in highest growth opportunities: data & analytics, ESG, benchmarks, indexes, private markets, FX, fixed income and digital assets.
– Expanding its global footprint further into North America, Asia Pacific, Emerging Markets and across Europe.
– Vertical integration within its value chain by cross-selling capabilities across the institutional, wealth and retail segments.
– Continuing to develop high performance and scalable technology.
– Disciplined capital allocation between organic investment, M&A, dividends and buybacks to drive EPS and shareholder returns.

LSEG set a medium term target to achieve compound annual revenue growth of 5-7% and EBITDA margin improvement to 50-60% range. This implies continued strong growth in earnings and cash flows.

Risks

LSEG does face potential risks to its outlook including:

– Cyclical downturns or volatility in financial markets and economy impacting trading volumes and asset values.
– Intensifying competition from aggressive rivals and disruptive new technologies.
– Tighter regulatory scrutiny and need for increased compliance investments.
– Integration challenges, execution risks and high leverage from large acquisitions.
– Cybersecurity threats.

However, LSEG’s diversified business mix provides some resilience across market cycles. Its global footprint also provides greater diversification benefits.

Conclusion

In conclusion, London Stock Exchange Group appears to be a very good company based on:

– Strong portfolio of leading global exchange, data and technology brands with defensible competitive advantages.
– High barriers to entry and regulatory requirements limit threat of new entrants.
– Transformative Refinitiv acquisition positions LSEG for significant growth in data and analytics.
– Strong track record of revenue growth, earnings growth and cash flow generation.
– High margins with further upside potential from operating leverage.
– Favorable industry trends providing tailwinds across major segments.
– Clear growth strategy focused on highest potential opportunities.

The outlook seems highly positive for LSEG to continue delivering strong returns for shareholders over the long run. The company has leading franchises and strong capabilities to thrive in the growing financial markets infrastructure and data industry. While risks exist from competition, regulations and markets, LSEG looks well positioned to manage these risks.