London Stock Exchange Group: Outlook is Positive

LSE’s IMS detailed revenue performance in Q3 indicates that overall income was 4% ahead of consensus with a reasonable beat in treasury income and capital markets. The former is likely to be looked through, but the latter is more encouraging with admission fees at their highest level since Q112. The outlook comment is positive. Despite the strong share price performance in the past month, partially driven by the re-negotiation of the LCHClearnet deal approaching final approvals, we expect this announcement to be well received.

IMS details
Revenue came in 4% ahead of consensus with a reasonable beat in capital markets and a smaller, less market-sensitive one in information services. The outlook comment is also positive, especially on market-related businesses. One of the key strengths of LSE is that it now has a diversified business mix and despite pressures on its traditional core business, the growth across the group excluding treasury was 1% on an organic, constant currency basis. The core business has been a drag on income growth for some periods and a potential improvement here is encouraging. There was a further beat in treasury income, but we believe the market may discount this somewhat given its volatile nature and the expected fall from here.

LCHClearnet
On 27 December 2012, LSE advised of revised terms for the LCHClearnet acquisition. The new offer is €14 cash plus €1 deferred consideration per share against the previous offer of €19 cash plus €1 spec dividend. There could be further adjustments if extra capital is required (this pricing is based off incremental capital requirements of €300m). The deal is close to final regulatory authority approval and we believe it should complete over the next couple of months.

Valuation: Reasonable valuation
We have raised our income estimates to reflect today’s announcement, but this has largely been offset by including the extra interest burden from the November bond issue. Our valuation has not changed materially since our last report (c £10.70). There should be some upside to this on the LCHClearnet acquisition, which we will include once the deal has completed. Recent market sentiment, together with the management outlook, has been more positive and would see further upgrades to our estimates and valuation if they continue. Overall, the current price is not unreasonable.

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