Global stock markets have been a bit mixed during April, though the FTSE 100 and FTSE 250 have posted positive returns. Reopening optimism continues, somewhat tempered by the announcement of further lockdowns in Europe following a rise in cases, and a less positive trend in economic leading indicators versus expectations. Metal and energy prices continue to rise thus propelling the commodity heavy UK markets higher.
Apart from macroeconomics, what has lead the UK markets higher in April is the beginning of the new ISA season. With individuals being given a fresh £20,000 allowance they could invest tax free, money came rushing in to the markets and propelled them higher. With cash ISA savings rates being close to 0, stocks are the only game in town . It is no wonder April has been a positive month for the UK market over the past several month. It is frustrating seeing stocks you have been eyeing tick higher but that’s the name of the game.
One stock that has not followed the mantra of a rising tide lifts all boats is the London Stock Exchange Group (LON:LSEG). The market is currently punishing LSEG as it believes the stock exchange group has overpaid in its recent deal to acquire data specialist Refinitiv and it will have a tough time integrating this company.
On the question on whether LSEG has overpaid for Refinitiv, it is still early days. But what I will say is demand for data is rising and the proposition that Refinitiv brings to LSEG is an interesting one. The data is embedded in customers’ systems and generates subscription based revenues – 80% of which are recurring. They are also high barriers to entry here as amassing data takes time and requires patient investment. There is no denying that Refinitiv is a unique asset. The question is has LSEG paid too high a price to generate any meaningful returns from this asset? LSEG has had to issue equity (more shares) in order to buy Refinitv and this could destroy shareholder value should it be seen to have overpaid. On this point it is interesting to note that Thomson Reuters (the previous owner of Refinitiv) has began to sell shares it received as part of the deal thus dampening the LESG share price.
The deal also brings with it execution risk. Refinitiv has been the biggest acquisition the London Exchange Group has ever made. And its not even close. Refinitiv sales are more than double “old” LSE’s and it employs more than three times as many people. The challenge of integration brings execution risk, especially in the context of Refinitiv’s recent chequered history as part of Reuters and then Thomson Reuters’s financial division and arguably the relatively untested skills of the senior management team managing an integration of this size and complexity. Recent results show this challenge as LSEG mentioned integration costs will be higher than expected. Never a good sign.
Even with all the negativity currently surrounding LSEG, I still believe it offers a compelling investment from here on in. The company is still a high quality one and its valuation doesn’t quite reflect that at present. If LSEG was trading in the US, it would not be hard to imagine it trading at double the level it is trading on now.
I have been saying for a while that high quality UK listed shares are trading at significant discounts to their global peers and the LSEG is no difference.
But this is a problem for LSEG the business. As company’s believe investors are putting a discount of UK listed shares, they do not have the incentive to list on UK markets. Just look at growth company’s such as Abcam, Blue Prism and Maxcyte moving their listing or having a second listing in the US. For the company that owns the London Stock Exchange, this is not good news. You want company’s to be listing on the London markets, not running away from it. Yes there has been a review to entice more companies to list on the London market but would that be enough? In this sense, LSEG is a play on London capital markets. If you believe London will continue to be a premier global finance destination, buying in to LSEG could be your way of playing that trend.
I for one believe London to still be one of the prominent global financial centres in the years and decades to come. With a globally connected market, skilled talent, and regulatory and government support, London is global financial centre that offers a full-package innovative ecosystem.
It is no surprise then that II have used the dip in LSEG shares to buy stock in the company. In fact, LSEG was the only purchase I made during April 2021.
I bought 4 shares of LSEG at £74.21 each.
If LSEG remains at these levels, I will keep buying shares month on month. It is not a stock that will shoot the lights out. It is not a stock that will have a 100% return a quarter. Instead it is one of those where you buy it, tuck it in the bottom drawer and let it slowly compound for years to come.