The U.K. government is determined to revive the City of London as the preeminent global financial center. This should support the London Stock Exchange Group PLC's (LSE:LSEG, Financial) struggling Capital Markets and Post Trade divisions. The Data and Analytics business is well placed to take advantage of the brave new world of big data Applications within the financial industry.
On July 10, U.K. Finance Minister Jeremy Hunt, in the annual Mansion House speech in the City of London, set out his plans for long-term reforms for the country's financial industry competitiveness. He said:
"I want the world’s fastest growing companies to grow and list right here, making LSE not just Europe’s NASDAQ but much more. As David Schwimmer and Julia Hoggett say, we want it to be the global capital for capital.
So today we are publishing draft legislation on prospectus reforms, delivering another milestone of Lord Hill’s UK Listing Review. This will create a more effective regime than its EU predecessor, giving companies the flexibility to raise larger sums from investors more quickly.
The government welcomes Rachel Kent’s excellent Investment Research Review published today and has accepted all recommendations made to it. We therefore welcome the FCA’s commitment to start immediate engagement with the market to inform any rule changes on removing the requirement to unbundle research costs by the first half of next year. This will ensure we are better able to fund quality research into the new Silicon Valley sectors.
Last week, we abolished protectionist rules inherited from our time in the EU such as the Share Trading Obligation and Double Volume Cap so UK businesses can now access the best and most liquid markets anywhere in the world.
And, in a highly innovative step which represents a global first, we will establish a pioneering new “intermittent trading venue” that will improve private companies access to capital markets before they publicly list. This will be up and running before the end of 2024, and put the UK at the forefront of capital market innovation."
I have been analyzing the London Stock Exchange Group, or LSEG, in recent weeks and below is my original SWOT analysis. I had put that the stock exchange business was both a weakness and a threat.
Strengths
For the first part of my analysis, I look at LSEG's strengths.
First, it has a dominant data and analytics business. The business, which includes Refinitiv data terminals and FTSE Russell indices, accounted for 70% of the group's revenue in 2022, highlighting its strength in the data industry.
It also has strong fixed income and derivatives revenue, which constituted nearly two-thirds of LSEG's Capital Market's revenues in 2022, providing a stable revenue source.
There are also advantages of London being a financial center. London benefits from advantages such as its time zone, well-respected legal system and widespread use of the English language, which contribute to its status as a global finance hub.
According to the GF Score of 81 out of 100, the company has strong growth and profitability ratings.
Weaknesses
The company also has several weaknesses.
The first is its diminishing significance of traditional exchange activities. LSEG's traditional exchange and clearing activities have lost significance over time, potentially impacting revenue growth.
A sluggish stock market poses challenges for LSEG's revenue growth, as it relies on stock market activity for profitability.
Further, London's diminishing relevance as a global stock market and potential loss of major companies to other financial centers raise concerns about LSEG's long-term growth prospects.
According to the GF Score, LSEG has weak financial strength and momentum.
Opportunities
Looking to the future, the acquisition of Refinitiv presents an opportunity for LSEG to create a powerful financial data entity by combining Refinitiv's data terminals with LSEG's existing FTSE Russell Indices business.
Further, Refinitiv's partnership with Microsoft (MSFT, Financial) to transition data services into the cloud offers the potential to enhance product quality, power and ease of use, as well as open opportunities for higher pricing.
LSEG has identified potential revenue boosts and cost savings from the combination of Refinitiv and FTSE Russell, presenting opportunities for increased profitability.
Threats
There is also some cause for concern as the dominance of Bloomberg in the financial data business, with a market share of approximately 33%, poses a significant threat to Refinitiv and LSEG's market position. Additionally, the network effect and essential nature of Bloomberg's terminals make it difficult for users to switch data providers, reducing the potential market share of Refinitiv.
Further, global stock exchanges and financial data companies face intense competition, limiting LSEG's ability to command high market valuations and pricing power.
However, with the U.K. government driving ahead with financial reforms, LSEG’s lagging capital markets business might find a bottom and even potentially get some growth.
Investment case
LSEG's investment case is based on several factors.
On one hand, the company benefits from a dominant Data & Analytics business, with Refinitiv and FTSE Russell contributing significantly to revenue. Additionally, the company has opportunities for growth through the Refinitiv acquisition, which, if successful, could create a powerful financial data entity. Further, shifting data services to the cloud through the partnership with Microsoft presents the potential for improved product quality and higher pricing.
However, LSEG faces challenges, including a sluggish stock market, concerns over London's status as a global stock market and the dominance of Bloomberg in the financial data industry. The company needs to convince investors that the Refinitiv acquisition will pay off as concerns over return on capital employed remain.
Despite these challenges, LSEG has shown promising performance, with increasing revenue and profits, improved customer retention rates and good expectations for respectable revenue, earnings per share and dividend growth rates going forward. Strong free cash flow should reduce debt rapidly. However, LSEG's valuation might be a possible value trap.
Ultimately, the investment case for LSEG hinges on its ability to successfully navigate market challenges, demonstrate the value of the Refinitiv acquisition and capitalize on its strengths in the data industry. If it can lobby the U.K. government to really follow through on its stated financial market reforms, this could add some surprise upside and stop the rot in its capital markets business. The stock is firmly on my watchlist.
