It generated earnings before interest, tax, amortisation and exceptionals of 289 million pounds for the year to March 31, up from 185.6 million pounds a year earlier, on strong volume growth and the acquisition of Borsa Italiana.

The result, the first to incorporate Borsa Italiana, was above a consensus forecast of 274.5 million pounds.

Proforma adjusted operating profit increased 26.5 percent to 343 million pounds, assuming the Milan bourse takeover completed in April 2006.

At 1035p each, LSE shares trade at 14 times adjusted basic earnings per share (EPS) of 73.1 pence each, up 30 percent from a year earlier.

NOT FAIR VALUE

The stock trades at 13 times forward earnings, a discount to its global peers -- Deutsche Boerse trades at 17 times forward earnings, while NYSE Euronext and Nasdaq OMX trade at 19 times and 17 times respectively.

"In relation to serving our expectation for the year, the current price doesn’t reflect the value of the company," said Chairman Chris Gibson-Smith.

To defend itself from competition, the LSE said it will review all fee structures as well as upgrade trading engine TradElect to halve latency to 3 millisecond by October.

It aims to go sub-millisecond by the end of 2009, matching that of new entrants.

"We have next-generation technology and we can now do capacity upgrade on TradElect at one-fifth of the previous cost, which obviously gives us a competitive advantage," said CEO Clara Furse.

The LSE, which completed the Borsa Italiana acquisition in October, expects CC&G and Monte Titoli, two post-trade services from the Milan bourse, to reduce total trading costs.

"We continue to be flexible in our pricing structure to ensure that we remain highly competitive ... our main focus is on doing everything we can to reduce frictional cost in the network. That’s what drives volume growth," added Furse.

But while volume of trades of UK equities increased 25 percent in May, the value of trades dropped 14 percent due to a slowdown in client activities.

Furse expects migration of Italian equities trading to TradElect by September to drive volume growth, and the LSE to benefit as companies shift from debt financing to equity financing.

"We are confident about the future," she said.

The exchange plans to launch an Italian version of its junior board, the AIM Italia, before the end of 2008. It will also start an energy derivatives market in Italy in September.

(Editing by Will Waterman/ Richard Hubbard/David Hulmes)