Lombard Risk Management: Record order book, sales and top-line growth
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.
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