RBC Capital has highlighted the London Stock Exchange Group PLC (LSE:LSEG) (LSEG) as one of its top 30 global stock picks, following the completion of the Refinitiv deal.
The acquisition has transformed LSEG into an enlarged group with higher-quality revenue streams and enhanced exposure to secular growth themes, the Canadian investment bank concludes.
According to RBC, the diverse, mostly recurring revenue streams of the enlarged group are expected to convert to strong cash generation across all time horizons.
Analysts there also anticipate leverage will reduce to 1.6x by December 2023.
They suggest that surplus cash generation could be used for share buybacks from Thomson Reuters (NYSE:TRI) & Blackstone, debt reduction, increased shareholder returns, or, preferably, investment in a range of strategic initiatives outlined by the group, which could offer upside potential to RBC's EBITDA estimates for outer years.
The bank contends that LSEG's most relevant peer group has changed to information service providers following the transaction.
In comparison to this peer group, LSEG trades at a discount to sub-sector averages in P/E and EV/EBITDA terms, despite boasting above-average expected earnings growth.
RBC also identifies improving cyclical factors and the redeployment of surplus cash from 2023 onwards as potential sources of upside to their estimates.
It derives its price target of 10,200p for LSEG from a discounted cash flow model, which supports an 'outperform' rating. It also believes a 2023 P/E of 30x is justified given LSEG's strong free cash generation and exposure to structural growth markets.
RBC notes that risks to the rating and price target include potential integration issues with Refinitiv, increased competition in LSEG's three business areas, and lingering Brexit uncertainties.
The shares fell 1.4% to 7,758p. Of the 18 banks logged as followed LSEG, 15 are positive on stock in the exchange and data group. The consensus price target is 9,542p.