London Stock Exchange Group PLC (LSE:LSEG)’s share price performance since the beginning of March has been dismal and the knives are out for management, UBS thinks.
The Swiss bank notes that much of the past eight years, the information provider and bourses operator has been a rarity in the EU financial sector in that it was a serial outperformer when many other financial stocks, such as insurers and banks, were out of favour.
That all ended in March when the group warned of rising costs, since when investors have been leery of the fiscal guidance issued by the group’s management.
“We argue LSEG's 15% share price decline since its Q3:21 IMS [interim management statement] proves the stock remains a 'Show-Me' story. We think it is imperative for LSEG's management to improve investor sentiment in the next 9-12 months before a share overhang compounds the negative pressure on LSEG shares,” said UBS, which has a ‘neutral’ rating on the stock.
Blackstone and Thomson Reuters (NYSE:TRI) together own just over a third of the company’s shares and lock-in agreements preventing the sale of shares equivalent to around one-ninth of the total London Stock Exchange (LSEG) shares in issue are set to end in January 2023, so the clock is ticking.
January 2024 and January 2025 see lock-in agreements on more shares expire such that one or both core holders could be gone from the shareholder registry by January 2025.
“We expect Blackstone to be a seller of those shares over time while Thomson Reuters indicated it views the investment as a "stored value which can be monetised over time". While this share overhang is not currently on the radar for most investors, we think it will become a greater concern in H2:22 [second half of 2022],” UBS said.
For LSEG's management, the bank has a few suggestions, many of which entail reducing complexity, such as changing the reporting currency to US dollars and offloading non-core businesses.
UBS also suggested that a share buyback programme could mitigate the impact of any share sales by Blackstone or Thomson Reuters or, indeed, the threat of sales.
The bank calculates that around £5bn of shares currently held by committed shareholders could be added to the “free float” – shares not held by committed shareholders – between now and January 2025 and while LSEG’s cash generation is probably not prodigious enough to mop up all of those shares, it thinks that with projected free cash flow of £1.3bn a year it could siphon off a substantial amount.