Morningstar | Another Strong Quarter of Growth and Cost Control for London Stock Exchange
Wide-moat-rated London Stock Exchange reported second-quarter results that fit well within our long-term thesis on the firm. Revenue growth and cost savings were slightly ahead of our expectations, and we are increasing our fair value estimate to GBX 4,800 from GBX 4,550.The exchange remained on track for all major initiatives, with strong revenue growth and continuing margin expansion. We were also reminded once again that, while Deutsche Boerse is gaining some share in the euro interest-rate-swap clearing market, euro-denominated swaps, which originated from the European Union, only made up 6% of SwapClear’s total clearing volumes in the first half of 2018. While there were some drastic headlines about Deutsche Bank’s move to send more clearing volumes to Deutsche Boerse, it is not entirely surprising that the largest German bank might favor the largest German exchange as Brexit plays out. Overall, we still view the threat as fairly small for LSE, and the exchange has numerous other growth initiatives already playing out that don't depend on the politically charged Brexit negotiations.
Total revenue (excluding net treasury and other income) was up 12% for the current six-month period, at GBP 953 million. This is slightly ahead of our previous projections, and more than meeting our projections for close to a double-digit compound annual growth rate over the next five years. Net treasury income was up 38%, leading to total income increasing 12% so far this year. Operating expenses were only up 2%, leading to solid margin expansion as adjusted EBITDA expanded to 51.3% for the first half of 2018, from 46.8% for 2017.
Information services continued its strong performance and remained right in line with management’s goal of sustained double-digit growth, with gross profit up 16% for the first six months of the year, although organic growth did slow down a little bit, coming in at 9% on an organic and constant-currency basis. FTSE Russell drove the majority of this performance, and ETF assets under management benchmarked was up 22% year over year.
LCH also performed well. Total revenue was up 14% year over year, with double-digit growth coming from the over-the-counter clearing segment, which includes SwapClear, ForexClear, and CDSClear. SwapClear continued its dominance of the industry and strong growth in general, with the notional cleared increasing 23% year over year for the first six months of the year. While Deutsche Boerse did gain some share, its total share of OTC clearing compared with SwapClear overall is still minuscule, at just above 1%. This is in part due to the number of products LSE clears, and DB’s share within cleared euro interest-rate swaps is a bit higher. If we assume that Deutsche Boerse is only clearing euro-denominated interest-rate swaps originating from the EU, then its share of clearing volumes is closer to 20% for this specific market. However, we believe LSE’s diversification and access to global markets, across multiple products and currencies will carry it through for the OTC clearing market as a whole. We have been particularly pleased with the growth LSE has seen with ForexClear, where the firm has created innovative new products and gained traction in a developing marketplace. For ForexClear, the notional cleared was up 79% for the first six months of the year. The firm just launched a new foreign exchange clearing product, deliverable foreign exchange options clearing, which should contribute to additional growth in the future.
Results were a bit more muted for CC&G and Monte Titoli, as overall activity levels did not show a strong increase, and total revenue is down slightly for the first six months of the year. The capital markets segment saw decent growth, with pickups in activity across both primary and secondary markets, and total revenue was up 13% for the first six months of the year.
London Stock Exchange Group is a global markets infrastructure business based in the United Kingdom. Co's operating segments include: Information Services, which provides a range of information and data products including indexes and benchmarks; Post Trade Services LCH, which provides clearing services through which counterparty risk is mitigated across multiple asset classes; Capital Markets, provides access to capital for domestic and international businesses and electronic platforms for secondary market trading of equities, bonds and derivatives; and Group Technology, which provides secure technologies to customers that require performance at high levels of availability and throughput.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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