UBS upgrades LSE to 'buy', cites attractive entry point

UBS upgraded London Stock Exchange on Wednesday to ‘buy’ from ‘neutral’, pointing to an attractive entry point.

"Our view on LSEG's management has improved in recent quarters as revenues (ex-one time items), costs and leverage have generally progressed better than we expected," UBS said.

"And with LSEG's shares down more than 20% since early April, we think current valuations offer an attractive entry point (19x 2023 EPS) for a business that can grow revenues circa 5% per annum (c70% of revenues from recurring sources), is positively geared to interest rate & FX volatility (via Tradeweb, LCH and FXall), and should generate 9% EBITDA and 13% EPS compound annual growth rates over 2021-24 due to cost synergy and deleveraging opportunities."

UBS said that given the "very favourable" risk-reward, it sees limited downside and around 25% upside to its unchanged target price of 8,500p.

In terms of catalysts, the bank said it expects to see upward revisions to 2022-24 consensus earnings per share when analysts update their LSEG estimates in July, following the close of the second quarter.

"The upgrades are likely to come in the form of FX tailwinds which we do not think have been factored into consensus estimates," it said.

It noted that as of last week, GBP was down an average 10% year-on-year against the US dollar, and said that with LSEG generating around 75% of its 2021 EBITDA in USD, the FX moves should provide nice tailwinds for the company’s earnings in the coming quarters.

At 1030 BST, the shares were up 5% at 7,078p.