Despite a seemingly strong set of results and an increase in revenue growth guidance for the full year, shares in London Stock Exchange Group (LSEG) fell as much as 6% shortly after the open as investors homed in on a rise in costs and continued weakness in trading income.

By mid-morning the shares had recovered to trade down 206p or 2.5% at £80.80.

WHY WERE THE SHARES SOLD OFF?

While total income for the six months to June rose 11.9% to £4.18 billion, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) only grew by 4.1% to £1.87 billion meaning the group profit margin dropped from over 50% to under 47%.

On a reported basis, operating profits actually fell by 18.7% to £729 million and EPS (earnings per share) dropped even faster, down 21.2% to 77.2p against 98p a year ago.

In a brief statement the group said EBITDA and earnings were impacted by non-cash FX (foreign exchange) balance sheet adjustments and a higher effective tax rate, but this seems to have left investors scratching their heads.

On the plus side, management reiterated its full-year EBITDA margin target and raised its forecast for constant-currency growth in total income to ‘towards the upper end’ of its 6% to 8% guidance range.

There were also positive progress updates on the Acadia acquisition and the Microsoft partnership, and the promise of up to £750 million of share buybacks by April 2024.

THE SHRINKING UK STOCK MARKET

One notable feature of the results was the sluggishness of banking and trading revenue, which increased by just 2.5% in the first half compared with 6% growth for investment solutions, nearly 9% growth in enterprise solutions and over 13% growth in customer and third-party solutions.

One of the big problems facing the exchange is the weak performance of the UK stock market, as overseas investors have stayed away in the last couple of years, together with a lack of new issues.

At the same time, private equity buyers are snapping up UK companies at a rate of knots, and a growing number of firms are leaving the market – either to list overseas or simply delisting altogether for financial reasons – so the overall capitalization of the market is shrinking.

Charles Hall, head of research at Peel Hunt, argues this shrinkage matters in terms of economic growth, the attraction of the UK as a listing venue and depth of market knowledge.

‘There has been considerable de-equitisation of the UK market over a number of years and the pace is accelerating’, warns Hall.

‘Reform of the listing requirements and research rules should help, but much more needs to be done to ensure that being listed is seen as an attractive option.’

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