Berenberg cuts LSE price target but sees buying opportunity

Berenberg cut its price target for London Stock Exchange's shares but said the recent drop in the group's share price was a buying opportunity.

LSE investors, facing rising costs and slowing growth, have lost confidence in the group's merger synergies but this lapse is misplaced, Berenberg said.

Berenberg kept its 'buy' rating on LSE shares but cut its price target to £100 from £118 to reflect investor concerns and reduced earnings estimates.

The company's shares fell by a fifth in the five days after its fourth-quarter results on 5 March but only half that decline can be justified by cost guidance. The rest reflects waning confidence in LSE's ability to extract synergies from its Refinitiv acquisition and concerns about future growth, Berenberg said.

The acquisition only completed on 28 January and Refinitiv's accounts were unaudited when LSE released its results and so leaving synergy targets unchanged was justified, Berenberg said. Management's true synergy targets could add £200m of earnings in addition to its stated goal, the broker said.

Concerns over growth are also misplaced and a 14% rise in assets at FTSE Russell exchange-traded funds in the fourth quarter and later should turn the headwind of weak asset prices into a headwind, Berenberg said.

LSE is now mainly a data provider rather than an exchange and this transformation is under-appreciated, Berenberg said. Refinitiv will add to its ability to generate stable revenue and its exposure to growing demand for data for trading and investing and derivative clearing.

"We continue to believe that LSE’s management will exceed its stated synergy expectations and we expect growth headwinds in LSE’s FTSE Russell business to become tailwinds during FY 2021. This can support confidence, as well as earnings," Berenberg analyst Peter Richardson said in a note to investors. "

"The 20% fall in LSE’s share price following its Q4 2020 results provides an attractive entry point … with the shares now trading at a 20% discount to global exchanges."

LSE shares rose 0.6% to £73.14 at 13:53 GMT.