Tough H1, but primed for a record H2
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.
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