Riding the 'RegTech' revolution
​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.
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