Shifting the goalposts in the aftermath of its mammoth Refinitiv deal caused investors to rethink the growth potential of London Stock Exchange Group. Confidence in its sales growth might be improving, but there is more work to be done to prove it can keep costs in check. To that end, in a capital markets day last week its management set out fresh organic growth and margin ambitions.
It is now targeting annual organic revenue growth in the mid-to-high single digits before accelerating after next year. That compares with a firmer target of 5 per cent to 7 per cent set in 2019, when it announced the Refinitiv takeover. That guidance is looser in recognition of the inflationary pressures and global political turmoil that have added to uncertainty since it agreed to purchase the data provider for $27 billion.
The group is pinning its hopes on investments made in improving the technology sitting behind its platforms and, crucially, its deal with Microsoft to make the functionality of its products better and thus spur demand. The latter, ten-year agreement will move the exchange operator’s data into the cloud.
The idea is that the data will be available on Microsoft programs, such as the Teams communications tool and the likes of Excel. This will allow users to communicate more easily and to create financial models and analyse data from LSE Group content on Microsoft software. The tie-up is not expected to start materially contributing to revenue until 2025.
The bourse’s record on organic growth is improving. During the first nine months of the year sales rose by 6.7 per cent, ahead of targets set out at the time of the Refinitiv deal. Last month the guidance was raised for organic sales growth to between
6 per cent and 8 per cent for the full year.
The group has been easing towards data and index products, increasing the proportion of recurring revenue and putting it less at the mercy of flotation and broader fundraising activity on London’s markets. Almost three quarters of revenue is deemed to be recurring, while capital markets business accounts for about a fifth.
The shares trade at a premium to rival exchanges, a recognition of the move towards subscription revenue. At almost 24 times forward earnings, LSE Group is almost twice that of Euronext and higher than a multiple of 20 for the Intercontinental Exchange. Yet investors still have an eye on parts of the business linked to more volatile trading volumes, which explains a discount compared with information service providers such as MSCI, FactSet or Moody’s.
The group is yet to hit a 50 per cent margin target, the aim for this year. Consensus sits at 47.2 per cent. It is hoping its data and analytics business will unlock margin growth. Margins in that business have been lower than its rivals, at 45 per cent, versus 51 per cent for the broader peer group.
The Refinitiv deal brought the chance to strip out costs, but integrating and bringing the business up to scratch has cost more than anticipated. After 2025 the cost of integration should run off. However, “business as usual” expenditure is the biggest outlay, forecast at £750 million this year, the same as last year but up on £671 million in 2021. Weighty levels of capital expenditure are set to continue. Next year expenditure will be held at between 11 per cent and 12 per cent of sales, which compares with 9 per cent before the Refinitiv deal. Then LSE Group has said capex will decline “over time” to somewhere in the high single digits.
It will need to show more progress towards its margin target to gain more traction with investors.
ADVICE Hold
WHY Sales growth is promising but the group needs to show more progress on costs
Cranswick
Cranswick has reached a crossroads on inflation. Higher livestock costs finally are being reflected in sales prices and, together with improving demand, it means the pork and poultry producer has lifted its adjusted pre-tax profit forecast to the top end of a consensus range of as high as £161 million. That’s up from £155 million at the mid-point. Margins recovered to 6.8 per cent in the first half, from 6.1 per cent a year earlier.
Greater automation and scale efficiencies have helped. The purchase of another pig farming business in Lincolnshire means the group has reached self-sufficiency in more than half its pork production. That is important for Cranswick’s ability to handle supply chain shortages, given that rising costs have caused the size of British pig herds to contract by almost a fifth over the past 18 months.
The investment is being funded via cash generated by the business, which rose by about two thirds to £78 million during the first half of the year. Since 2016, the group has spent £600 million on production facilities and another £200 million on acquisitions. That has been far outpaced by free cash generation of £1 billion or so.
The return on capital employed edged up to 16.4 per cent, but still exceeds a weighted average cost of capital in the low double digits. Net debt of only £51 million equates to a leverage ratio of a mere 0.6, well below a target ceiling of two.
Yet there are challenges, reflected in a forward price/earnings ratio of just under 17, towards the lower end of the long-running range. Weak demand from China has caused export volumes to fall, which weighed on overall sales, down 2.7 per cent over the first six months.
Fortunately, about three quarters of sales come via British retailers, where customer demand has strengthened and has helped to push domestic food sales volumes 2.7 per cent higher. The company expects volumes to continue to rise in the second half of the year. Price inflation means group like-for-like sales are 12 per cent higher.
If inflation remains under control, the market could start to appreciate Cranswick’s cash-compounding qualities.
ADVICE Buy
WHY The shares are cheap given the margin recovery
