EUR 850.00 For Business Accounts Only

Morningstar | London Stock Exchange Finishes Excellent 2018, Appears Well Positioned for Multiple Brexit Scenarios

Wide-moat-rated London Stock Exchange reported fourth-quarter and full-year results that fit well with our long-term thesis on the firm. LSE is easily meeting all of its medium-term growth goals, margins are improving, and the worries over the effects of Brexit on LSE’s OTC clearing dominance appear to be waning. Overall, 2018 was an excellent year for the exchange. Gross profit was up 10% for the year while underlying operating expenses were up roughly 2%, leading to a 16% increase in yearly profits and a 17.5% increase in adjusted EPS. EPS of GBP 1.71 came in almost exactly in line with our expectations of GBP 1.72. Management has maintained the majority of medium-term guidance, and we believe our thesis on LSE remains intact. Therefore, we do not plan any material revisions to our fair value estimate of GBX 4,600 as we more fully incorporate full-year results into our model.

All key segments remained on track for the exchange. The information services segment (the home of FTSE Russell) had revenue growth of 14% for the year, easily meeting the goal of double-digit growth. LCH saw even more impressive growth, with the segment as a whole seeing revenue growth of 14%, while OTC clearing revenue specifically grew 16%. Even the capital markets segment grew roughly 4%, and while CurveGlobal remained unprofitable for the year, the unit is still seeing significant volume increases, with January seeing the most contracts ever traded on the platform. This remains a key advantage we see for LSE, where the exchange’s open-access model allows it to continually develop new products and attempt to tie different products together in ways where clients can reap new efficiencies and benefits. In this same vein, ForexClear has essentially created a new market for LSE’s clearing franchise as the firm has innovatively created products that serve a previously nonexistent market.

Management did admit that it will not meet its previous goal of only 4% expense growth per year. However, we’ll note that this is only due to increasing depreciation expense, which is due to increased investment. In our view, LSE has created massive shareholder value through good acquisitions and good investments in innovation, ForexClear being one of the latest examples. We would much rather have the exchange investing for the future than trying to meet arbitrary expense goals.

We believe the impact of Brexit negotiations on the business remains top of mind for investors, and it appears the situation is becoming more clear. There are plans and agreements in place in the case of a hard Brexit that would allow LCH to continue to operate in the European Union for as long as three years as both sides attempt to figure out how to deal with such a scenario. Further, the EU has agreed that as long as providers such as LCH maintain the EU’s regulatory standards, these providers should continue to be allowed to serve the EU market. Management also reiterated that it has seen no discernible changes in customer behavior. All of these factors lead to us to reiterate our overall thesis that LSE’s wide moat in the space is intact.