Lombard Risk Management
http://www.lombardrisk.com/ TICKER: LRM EXCHANGE: AIMLombard Risk Management (LRM) is a leading provider of specialist regulatory reporting and collateral management solutions employing around 380 staff. At end 2016 these niche solutions were used by over 340 banks, hedge funds, asset managers, prime brokers, corporate treasuries, utilities, oil groups, trading houses and other institutions.
LATEST REPORTS
Tough H1, but primed for a record H2
Published: Oct 25 2017
Lombard Risk Management (LRM) is a leading provider of specialist regulatory reporting (40% FY17 sales) and collateral management solutions (60%) employing 337 staff.
Predicting the exact moment when large contracts land is never easy, but made doubly difficult if customer purchasing decisions are impacted by outside forces. This has been the case for LRM in the first half, as several chunky orders have been pushed to the right ahead of new MiFID II rules being introduced on 3 Jan’18. Not least, one significant collateral deal, worth £3.25m in license fees alone, which is now anticipated to be signed in late Q3, or early Q4.
With regards to the detailed numbers, H1 turnover came in at £12.7m vs tough comparatives (-16.4% £15.2m LY), reflecting weaker license bookings (-63.6%) and a slide in collateral management (-38%), EMEA (-25%) and AsiaPac (-29%) sales.
However, with buoyant demand set to return soon, turnover is forecast to snapback sharply in H2 underpinned by a record pipeline of >120 qualified leads, £9.2m backlog and growing base (50.4% in H1) of recurring work. We also expect costs as a % of turnover to drop gradually next year as the Birmingham site reaches full operational capability by June 2018 - allowing greater organisational simplification and the elimination of duplicate overhead in Shanghai.
There remains some execution risk and so, despite guidance being reiterated today, we have conservatively trimmed our FY18 top line and EBITDA projections to £38m and £4.5m respectively, from £40m and £6.3m before. Yet that still represents a none-too-shabby H2 growth rate of 32%.
Bearing all this in mind, our DCF model derives a value of 19p/share, based on a blend of FY22 exit multiples, discounted back at 15% and adjusted for cash. At 11p/share, LRM trades on a forward EV/sales multiple of 1.0x compared to the average of 3.8x, even though it is expanding faster than many of its peers.
Positive market and encouraging pipeline
Published: Jul 19 2017
Founded in 1989, Lombard Risk Management (LRM) is a leading provider of specialist regulatory reporting (40% FY17 sales) and collateral management solutions (60%) employing 385 staff. These niche solutions are used by >340 banks, hedge funds, asset managers, prime brokers, corporate treasuries, utilities, oil groups, trading houses and other institutions – including 30 of the top 50 global banks.
The good news in today’s AGM statement is that the market backdrop remains supportive, with the company saying that demand for its products is “positive” and “the landscape largely unchanged” since the prelims in May.
After such an outstanding close to FY17, it was almost inevitable that Q1’18 was going to be somewhat quieter for new license orders. This happens most years (see below) as the pipeline is naturally replenished following a strong Q4. Typically leading to a 35%-45% vs 65%-55% revenue split across H1:H2.
We do not change our FY18 forecasts of adjusted EBITDA (post R&D capitalisation) and cashflow breakeven on revenues of £40m (£34.3m LY) - leaving Mar’18 net funds flat at £6.8m (LY £6.8m). There are ample sales opportunities to achieve these targets - with the pace of pipeline conversion expected to accelerate in H2, and Q4 traditionally being the strongest quarter.
Given the H2 bias, the level of certainty has diminished slightly. Meaning that we consider it prudent to nudge down our valuation from 26p to 20p/share - but stress that at 13p, LRM trades on a forward EV/sales multiple of only 1.1x compared to the sector at 3.9x.
Lombard Risk Management - Equity Development Investor Forum, June 2017
Published: Jun 23 2017
Alastair Brown, Chief Executive Officer, presents an overview of Lombard Risk Management.
Final Results Webinar May 2017
Published: May 25 2017
Alastair Brown and Nigel Guerney report on the last year, the step change in revenues they have seen, and their plans to bring the business to profitability in the next 12 months.
Record order book, sales and top-line growth
Published: May 24 2017
Founded in 1989, Lombard Risk Management (LRM) is a leading provider of specialist regulatory reporting (40% FY17 sales) and collateral management solutions (60%) employing 385 staff.
Today’s results show the company knock the ball out the park in relation to turnover (up 44.8% organically to £34.3m, or ED est. of +40% constant currency), adjusted EBITDA (£2.6m vs previous ED est. of -£0.4m), PBT (-£1.6m vs ED -£4.1m) and closing net cash (£6.8m vs ED £1.4m). But also came news that the order book ended March at a record £10.1m (+35%) vs £7.5m LY, with recurring revenues climbing 21% to £12.4m (run-rate £12.9m) – together providing >50% visibility of our FY18 £40m target, assuming most of the backlog flows into the next 12 months.
We think that this positive momentum should continue, buoyed by the secular trends of regulatory driven demand (Re RegTech) and overseas expansion – now representing 66% of turnover vs 57% LY – and underpinned by strategic customer goals to boost ROEs, improve efficiency, simplify operations and consolidate (often disparate) IT systems on a handful of best-of-breed software providers, like LRM.
FY18 should mark a major milestone - generating cash profits (post capitalisation of R&D) for the 1st time in 4 years. Also, from a risk perspective, even if things were to be delayed - with net funds of £6.8m, the company should have ample financial ballast to ride out the severest of storms.
We are predicting FY18 revenues and adjusted EBITDA of £40.0m and £44k (post £6.3m of capitalised R&D) respectively, rising to £62.3m and £13.0m (margin 20.9%) by FY21. This assumes an EBITDA drop through rate of 70% this year in line with mix benefits, and a reduced underlying (ie not statutory) forex charge (est. -£0.5m in FY17, due to the conversion of overseas losses rose into £s). Our FY18 adjusted PBT declines from £1.7m to £0.9m, simply mirroring the natural flow of R&D amortisation (-£0.7m) through the P&L, allied to slightly lower interest income (-£0.1m).
Assuming things go to plan, our DCF model indicates a value of 26p/share, based on a blend of FY21 exit multiples, discounted back at 12% and adjusted for cash. Moreover, on a comparative basis, at 14p LRM sits on a forward EV/sales multiple of just 1.2x – versus the sector at 3.8x - despite expanding much faster than the average.
Nb you can see the Management present via webinar tomorrow, Thurs 25th at 1.15pm Register
here
44% organic growth plus £7m of net cash
Published: Apr 19 2017
Founded in 1989, Lombard Risk Management (LRM) is a leading
provider of specialist regulatory reporting (47% H1’17 revenues) and collateral
management solutions (53%) employing around 280 staff. These niche solutions
are used by >340 institutions, including 30 of the top 50 global banks. 40%
of revenues are recurring, coming from annual maintenance and support agreements,
while 58% is denominated in non-sterling currencies.
Many bank executives often complain about the reams of financial red-tape, but not so Lombard Risk. This morning LRM delivered an update on what can only be described as a ‘phenomenal’ set of results – reporting that FY17 turnover, EBITDA and net cash will all be substantially above our estimates at £34.0m-£34.4m (vs ED at £31.8m), £2.4m-£2.8m (-£0.4m) and £7.0m (£1.4m) respectively.
Not only did H2 revenue climb 45% to circa £19.0m, surpassing the 43% achieved in H1 (£15.2m), but also, thanks to tight working capital and strong license sales (~£7m H2 vs £4.4m H1), H2 cashflow was positive at +£0.1m (vs ED -£4.5m), split -£1.6m Q3 vs +£1.7m Q4.
Once again the top line enjoyed buoyant demand for COLLINE (ED est 65% YoY), its best-of-breed Collateral Management software, especially ahead of the introduction of new Dodd Frank and EMIR (IOSCO) regulations on both sides of the Atlantic. This was ably supported by double digit expansion (ED est 25%) in Regulatory Reporting, forex tailwinds (£ weakness), and two major product launches (re AgileREPORTER and AgileCOLLATERAL).
These numbers show that H1’s numbers were not a flash in the pan - backed up by an even more impressive H2, with strong demand for LRM’s applications expected to continue for the foreseeable future. They also remove any lingering investor concerns that the business might need to raise fresh capital to fund its future growth plans. In our view, there are ample liquid resources to navigate through the severest of conceivable storms.
Progress is a stark reminder how materially undervalued the stock appears. Both on an absolute basis vs our new 26p/share valuation (20p before) - and relative to software peers, trading on a forward EV/sales multiple of 0.9x. That is despite being EBITDA and cashflow positive, along with generating organic growth significantly higher than the sector average.
Record year for collateral management
Published: Feb 22 2017
Lombard Risk Management (LRM) is a leading provider of specialist regulatory reporting (47% H1’17 revenues) and collateral management solutions (53%) employing around 280 staff. 40% of revenues are recurring, coming from annual maintenance and support agreements, while 58% is denominated in non-sterling currencies. Thus providing robust forward visibility and a natural hedge against any possible future £ weakness.
It is unusual to find a high tech software stock like LRM that is expanding its top line at >2x the industry average (or >7x global GDP), yet is priced at less than a third of sector EV/revenue levels. LRM is in this position despite this morning saying that over the past year its collateral management software (COLLINE, 53% of turnover) had been successfully “delivered to a record number of clients across both the buy/sell-sides in North America, with 5 major customers going live” in 2017.
With regards to the balance sheet, the company had net cash of £5.5m as at 31st Dec’16 (vs £6.9m 30th Sept), meaning that going forward we believe there should be more than sufficient capital resources to fund growth until cashflow breakeven is achieved in FY18. We make no change to our forecasts or 20p/share valuation, albeit reiterate that, given the favourable macro backdrop and forex tailwinds, LRM appears significantly undervalued.
Furthermore, as the business scales over time there should be a good opportunity to lift EBIT margins closer to peer group norms of 20%, via improved operating leverage, continued efficient capital allocation and higher turnover per employee (£85k/head vs sector at circa £120k).
ARCHIVE
2017
Lombard Risk Management Webinar January 2017
Published: Jan 20 2017
You can now hear Alastair Brown, Chief Executive Officer, and Nigel Gurney, Chief Financial Officer, update investors on Lombard Risk Management and answer questions.
To view simply click on the video below.
2016
Riding the 'RegTech' revolution
Published: Dec 15 2016
Founded in 1989, Lombard Risk Management (LRM) is a leading provider of specialist regulatory reporting (47% H1’17 revenues) and collateral management solutions (53%) employing around 380 staff. These niche solutions are used by >340 banks, hedge funds, asset managers, prime brokers, corporate treasuries, utilities, oil groups, trading houses and other institutions. 40% of revenues are recurring, coming from annual maintenance and support agreements, while 58% is denominated in non-sterling currencies. Thus providing robust forward visibility and a natural hedge against any future £ weakness.
Global spending on governance, risk and compliance (GRC) systems is forecast to rise from over $70bn in 2015 to a predicted $119bn (CAGR >10% pa) by 2020. (Source: Letstalkpayments). This presents a once-in-a-generation opportunity for ‘RegTech’ developers like LRM, who presently serve >340 clients worldwide, including 30 of the top 50 global institutions.
LRM reported record H1’17 license/services orders (+58% to £9.1m) and revenues (+41% to £15.2m) in October - thanks to buoyant demand for its leading Collateral Management (up 65% to £8.1m) and Reporting (+23% to £7.1m) modules. Looking ahead, we think that this momentum will continue, aided by the Sept’16 launch of AgileCOLLATERAL, which is designed for derivative traders who need standardised SaaS solutions to meet their IOSCO margining requirements. LRM’s customers seem to like what they see, as evidenced it’s 90%+ retention rates and expanding market share. In March 2016 the group even had time to ink a landmark deal to integrate its cloud-based AgileReporter into Oracle’s world-wide financial platform. This partnership could be a major money-spinner, with 5 contracts already signed to date, worth ~$2m in aggregate.
In terms of the full year numbers, we are pencilling in FY17 revenues and EBITDA of £31.8m and -£6.7m (post £6.3m R&D capitalisation) respectively, rising to £59m and £10m (margin 17%) by FY20. Moreover, our forecasts suggest there should be no need to raise additional capital, given that the business is expected to break-even next year on turnover of £39.9m. So what do we think is a reasonable value for LRM? Well, assuming things go to plan, our DCF model indicates a figure of 20p/share, based on a blend of FY20 exit multiples, discounted back at 12% and adjusted for cash.
