Esker
Equity Market Cap (M) €979
Information technology
Emmanuel Olivier, COO
Esker is a French document process automation software developer. Its software is primarily used to automate its clients’ accounts receivable and accounts payable functions and Esker has been a beneficiary from the ongoing automation of back office processes. Emmanuel explained how the back office digital transformation has lagged other business functions, thus providing a long growth runway. Put simply, Esker aims to streamline the process of paying suppliers and getting paid by customers, all while making sure regulations are complied with. I was surprised to hear that even in accounts payable, the most digitised segment of Esker’s target market, c. 40% of processes are still manual with no form of automation. Beyond just the size of the opportunity, Emmanuel flagged additional regulatory tailwinds in France, where legislation is being brought in to reduce VAT fraud by digitising processes – something that seems likely to be replicated elsewhere.
Our focus turned to competitors, which Emmanuel noted are mostly of a similar size to Esker. Esker’s point of difference is that it covers all four processes of accounts receivable, accounts payable, order management and purchasing. Given the investment needed to overhaul back-office processes, client loyalty is typically high and churn is very low at 1-2% annually. This provides high barriers to entry for any company wanting to compete with Esker from scratch.
Esker aims to grow its sales c.15% organically and is targeting a 14% operating margin. Near-term margins have been guided lower however, as Esker hasn’t been able to pass all costs on to customers. Going forward, Esker will need to maintain its mid-teens growth profile and see margins recover if it is to justify its premium valuation.
London Stock Exchange Group
Equity Market Cap (M) £48,795
Financials
Peregrine Rivière, Group Head of Investor Relations.
London Stock Exchange Group (LSEG) is a leading global provider in financial market infrastructure and data, shifting focus in 2007 to become an information services business and over-the-counter (OTC) derivatives clearinghouse. This transformation enabled LSEG to lead trends in finance, including exchange-traded fund (ETF) adoption, OTC clearing, risk management and quantitative funds.
LSEG's competitive moat is sourced from its unparalleled leadership in real-time data and extensive global connectivity to 540 exchanges. Additionally, LSEG holds a distinctive edge with the longest running tick-by-tick trading history, dating back to 1996 – particularly significant in major securities, especially within the fixed-income market.
During the meeting, we explored the establishment of a 10-year strategic partnership with Microsoft, which places LSEG at the forefront of leveraging next-generation data and analytics, coupled with cutting-edge cloud infrastructure solutions. A minimum of £2.3bn over the partnership was jointly agreed to develop new products and services. This collaboration involved a substantial move, as Microsoft acquired a 4% stake in LSEG, securing a board seat. The partnership is set to facilitate the development of tailor-made generative artificial intelligence (AI) models, propelling growth in AI-related products. The partnership should flow through to increase existing user consumption from the widespread reach of Microsoft products, creating new revenue streams.
LSEG's commitment to the financial data business is shown through the acquisition of Refinitiv for US$27 billion and additional bolt-on acquisitions like TORA and MayStreet. These acquisitions distinguish LSEG from cyclical global exchange peers, with 1/3 of revenue now originating from information services. Despite this, LSEG currently trades at a price earnings (P/E) discount, with 1 year forward P/E at 27x, compared to MSCI at 38x, Moody’s Corporation at 34x, and S&P Global at 30x.
Prudential
Equity Market Cap (M) £21,513
Financials
William Elderkin, Head of Investor Relations
Prudential sells savings products, life and health insurance into Asia. China and Hong Kong account for a combined 30% of its business, Singapore 16%, Malaysia and Indonesia each at about 9% and the rest from other Asian countries.
The company has been a disappointing underperformer this year and is down 32% vs the FTSE100. It’s hard to pinpoint one specific point that has driven the share price down: Prudential has not had a catastrophic failure in one country or with one large insurance product and the business is ostensibly ticking on as it should be.
William reminded us of the strong metrics for growth guidance. Prudential aims to grow new business profit at 15% to 20% per annum and see double digit capital generation growth. This implies a capital expenditure and regulatory capital drag of perhaps 5%, which in our view is reasonable.
General anti-Chinese sentiment may play a role in its underperformance, according to William. Although China is only c.30% of the overall group, we were told that “Nobody wants to own anything to do with China right now, especially so in the USA”. That’s a not unreasonable assumption as both Prudential and AIA, Prudential’s closest Hong-Kong-listed competitor, have followed the Hong Kong market down. Both companies have slightly underperformed the local market over the last year but Hong Kong’s Hang Seng Index is down 28% vs the FTSE100, so that makes for Prudential having a 4% local underperformance.
Back in February last year Prudential was trading at £14 per share. It’s now at £8, which is below the £9 lowest broker/investment bank valuation that we can find. It’s also below the median broker/investment bank valuation of £13. Perhaps China’s woes will turn out to justify this valuation.
CONSUMER DISCRETIONARYTesla
B&M
CONSUMER STAPLESBarry Callebaut
Unilever
ENERGYShell
FINANCIALSHSBC
Prudential
LSEG
Aviva
HEALTH CARENovo Nordisk
AstraZeneca
Genus
INDUSTRIALSDiscoverIE
Experian
INFORMATION TECHNOLOGYDarktrace
Esker
MATERIALSAnglo American
Rio Tinto
REAL ESTATETritax EuroBox
LondonMetric
SEGRO
Henry Birt, Assistant Research Analyst (Esker)
William McCubbin, Assistant Research Analyst (LSEG)
Sir John Royden, Head of Research (Prudential)
