Lombard Risk Management: Record year for collateral management
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).
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