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London Stock Exchange: 2006 results
Helped by the booming market, the London Stock Exchange announced a 19% increase in revenue (to £291.1m) and a 42% increase (to £120.1m) in operating profit (before exceptional items) in the year to March 2006.
The exchange said the number of new issues rose 21% to 622, including 409 IPOs representing 67% of all Western European IPOs in the period. The number bargains on the exchange’s electronic platform SETS rose 31% to 223,000 per day and the number of terminals in use rose by 9,000 to 104,000.
The exchange derives its revenue from its information services (which depend on the number of terminals in use), issuer services (fees for new listings) and broker services (dependent of the number of trades). The exchange also has a small loss-making derivatives service.
In terms of operating profits (excluding the loss-making derivatives business) the exchange earned half its profits from broker services, 33% from information services and 17% from issuer services.
Of the three main income streams, information services where revenue is earned by renting terminals to broking houses, is the least vulnerable to a downturn in the market. Brokers need to maintain a certain minimum number of terminals to trade, although, in the event of a prolonged market slump, some terminals will be sacrificed in order to reduce costs.
The other two income streams are highly market dependent. When the market is booming, the number of IPO’s and trades rises, both of which will serve to increase the exchange’s revenue, as is the case this year. When the market slumps, the reverse is true.
The London market has boomed in the last few years, fuelled by record earnings in the oil, gas, mining and property sectors as well as generally strong economic performance. Rising interest rates are likely to dampen growth and may result in lower revenues for the exchange in the medium term.
When revenue is uncertain, we always look a lot harder at costs and the LSE has reported a 7% rise in administrative costs driven by higher staff numbers. The derivatives business, which lost £26.8m including an exceptional goodwill write down of £23.2m also needs to be monitored closely.
The exchange is trying to develop this business and it will take time for this to pay off but if losses continue at any significant level they are likely to drag down earnings for the entity as a whole.
The markets are still performing well and short-term prospects look sound. Longer term will performance is harder to gauge and is dependent on the overall performance of the market.
The share trades at 1094.75p, on a prospective PE (2007 earnings) of 21.7x at the top of the sector range. A flurry of takeover bids has pushed the share price to its current levels and it is difficult to see it being sustained at these levels of earnings alone.
The yield is a poor 1.5%.
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