Surprised this has not rebounded - good news of a new deal and analysis saying deals have been pushed back into the next financial period - a common problem with software companies where income tends to come in lumpy contracts. This happened about a year ago, and the share price staged a strong recovery
Disappointing first half results from Lombard Risk Management (LRM:7p), a provider of collateral management and regulatory reporting software products to clients including 30 of the top 50 global banks, hedge funds and asset managers, led to a 30 per cent mark down in its share price, taking it well below the 10.5p level at which I last advised buying at (A five-timer of small-cap plays, 24 Jul 2017), and also my original 9p entry point ('Banking on regulation', 13 Mar 2017).
Longer lead times for deals to be concluded for Lombards AGILREPORTER regulatory reporting product which is being sold in partnership with Oracle, and an overreliance on North America which has since been addressed, were compounded by some slippage on clients committing to major software investments ahead of the introduction of the new MIFID II regulations in early January. This resulted in first-half revenues contracting by 16 per cent to £13.7m. And because the company had increased its cost base, reflecting investment in sales staff and a new facility in Birmingham, then given the scale of the revenue shortfall for what is a highly operationally geared business, this meant that cash profits of £1.5m in the first half last year reversed into a £3.5m cash loss. In turn, Lombards net cash position declined from £7m to £400,000, albeit it has £4.5m of untapped debt facilities in place. Its understandable that investors reacted negatively.
However, broking house finnCap didnt downgrade their full-year expectations which point to revenues rising 16 per cent to £40m in the 12 months to end March 2018 to produce cash profits of £6.6m, implying a 42 per cent increase in second half revenues to £27.3m. Thats because chief executive Alastair Brown and finance director Nigel Gurney informed me during our results call that the order pipeline of over 120 opportunities is well in excess of £40m, a record level and up 44 per cent since March 2017, Lombard started the second half with an order backlog of £9.2m, and recurring revenue of £6.4m is due to be delivered in the second half.
The two insiders also said that two contracts for Lombards compliance software product COLLINE, worth a total of £5m in license fees alone, are expected to be signed in the coming months. Lombard is the sole vendor in contention on the larger of these contracts, worth £3.25m, and the client on the other is targeting implementation in January. The cash flow from these contracts would boost Lombards cash position no end analysts at Equity Development are forecasting net funds of £5.5m at the March 2018 year-end and de-risk full-year profit estimates too. Although analysts at Equity Development and N+1 Singer clipped their full-year revenue by £2m, this still points towards full-year cash profits rising by 88 per cent plus to £4.5m and £4.9m, respectively, implying Lombards market value of £28m represents less than six times forecast cash profits.
The other key take for me was that Lombard closed its first contract with an Australian client in advance of the new Prudential Regulatory Authority regulations coming into force in the country. Given the similarity in the regulatory framework between the UK and Australia, this offers a huge opportunity for it to win more contracts.
So, although the seasonal second half bias to forecasts has increased markedly, the directors remain confident of delivering on their record pipeline, the successful execution and accompanying cash flow from which should support a reversal of last weeks hefty losses. I would flag up too that the shares are massively oversold with the 14-day RSI on the floor. Trading buy.
"The mark down in Lombard's share price today looks a massive overreaction. finncap and N+1 Singer have not downgraded their forecasts. True, the second half bias to the numbers has increased but they stil expect revenues to rise from £34m to £40m for the full year and the company to deliver a £4m rise in cash profits to £6.6m. Also, the directors are "confident of this being achieved." I also understand that two COLLINE contracts, worth £3.25m and £1.7m, respectively, in license fees alone, are expected to be signed in the coming months. The cash from this will boost the net funds position back to £5.5m.
Moreover, the order pipeline of over 120 opportunities is well in excess of £40m, a record level and up 44 per cent since March 2017, Lombard started the second half with an order backlog of £9.2m, and recurring revenue of £6.4m is due to be delivered in the second half.
Clearly, the second half bias to the numers has risen, but if Lombard delivers - and £15.6m of the second half revenue estimate of £27.3m is recurring revenue and the order backlog alone - then the share price is going to reverse today's losses. I see the shares as a trading buy at 7.25p.
Nope this share has been all over the place this year. I sold a few months ago after 12 years - made some money in the interim buying and selling, but the price has not move much over that time - often i dont understand the fluctuations - got back in a few weeks ago, but now at a loss.
If you would like to hear Alastair Brown, CEO, present on behalf of Lombard Risk Management he will be at our next investor forum on the evening of Wednesday 21st June. Other companies also presenting are Accsys Technologies and Carclo.
In order to find out more and to register for free please visit: https://www.eventbrite.co.uk/e/equity-development-investor-forum-june-2017-tickets-34745006249?ref=ebtn
I had an informative results call with the directors of Lombard Risk Management (LRM:13.75p), which provides collateral management and regulatory reporting software products to clients including 30 of the top 50 global banks, hedge funds and asset managers.
I first advised buying the shares at 9p ('Banking on regulation', 13 March 2017) after it became clear that sales momentum was building, a trend highly likely to continue for some time yet. For instance, at the tail end of last year, Lombard signed an agreement with Atos, an international leader in digital services, to facilitate the delivery of its award-winning collateral management solution, Colline, to the German market. In layman's terms, collateral management helps to reduce counterparty credit exposure, and is normally used with over-the-counter (OTC) derivatives such as swaps and options.
It's proving incredibly popular, as Lombard's results for the 12 months to end-March 2017 revealed that revenues from Colline surged by 83 per cent to £20.5m, the key driver behind the 45 per cent hike in the company's revenues to £34.3m. Importantly, all of the increase was organic and reflects not only a favourable regulatory environment, but also a hefty investment in product development - Lombard invested £7.5m in the last financial year and plans to spend a further £6.3m this year. In turn, its leading edge software is attracting major companies to the benefits of a product that delivers more efficient collateral optimisation, and provides clients with the capability to manage liquidity and trading book capital.
Product innovation is playing its part, too, as Lombard launched a new exchange-traded derivative (ETD) module so that Colline could extend its reach to all asset classes and products, covering activities in OTC, exchange traded funds, repo and securities lending. Demand has been strong across the board, with Lombard extending its global strategic partnership with Societe Generale, one of the largest financial services groups in the world, and reporting a record number of clients across both the buy and sell side in the US and Canada.
Trading prospects look well underpinned for another strong year of growth, too. Annual recurring revenue of £12.9m and an order book worth £10.1m, up 35 per cent year on year, account for more than half analysts' current-year revenue expectations of £40m. If achieved, the company's adjusted cash profits are expected to more than double to £6.3m (before capitalisation of research and development spend) based on forecasts from analyst Paul Hill at Equity Development, to deliver an underlying pre-tax profit of £916,000.
The point being that with a relatively fixed cost base, a high percentage of incremental sales will fall straight down to the bottom line from this point onwards. This explains why Mr Hill expects underlying cash profits (pre R&D) to surge from £6.3m to £10.5m in the 2018-19 financial year, based on revenues rising from £40m to £46.5m. If anything those estimates could prove conservative given that retention rates are running at 90 per cent-plus, and the company is looking to boost sales from third-party channels from around 5-10 per cent of the mix to around 25 per cent.
Of course, this ongoing build-up of sales has to be funded, but there are no issues on this score as the company has net funds of £7m and access to untapped debt facilities of £4.5m. Importantly, finance director Nigel Gurney and chief executive Alastair Brown assured me during our call that the company is more than fully funded to support the forecast sales growth with absolutely no need to tap shareholders. Analysts expect the company to be cash-flow positive in the current year, which is reassuring, too.
So, having last recommended buying Lombard's shares at 13.25p after a bullish pre-close trading update ('Four undervalued growth plays', 24 April 2017) and raised my target price to 20p at the time, I have no reason to change my b
Another positive write up in the IC on top of the news release....
Lombard Risk Management (LRM:13.25p), a leading provider of collateral management and regulatory reporting software products to 30 of the top 50 global banks, as well as hedge funds, asset managers and other institutions, has absolutely smashed analysts' forecasts for the full year to the end of March 2017.
It's clearly a good time to be servicing their needs given they have been slammed with over $200bn (£155bn) of fines for their previous misdemeanours during the light touch years in the run up to the 2008 global financial crisis, and are now facing an unprecedented wave of new regulations to keep their operations in check. At the same time, the top brass of these global banks prefer to source vendor software solutions rather than self build to comply with banking regulations, having slimmed down their IT departments in cost-cutting measures since the financial crisis. Lombard has clearly been exploiting the business opportunity.
Building on an excellent set of half-year results that revealed an eye-catching 43 per cent hike in revenue to £15.2m, the company has just announced that full-year revenue is expected to be in the region of £34m to £34.4m, easily beating analysts' expectations of £31.8m (Equity Development) and £32m (finnCap). This implies that second-half revenue increased by 49 per cent to £19m, so outpacing the heady first-half growth rate. Moreover, upgraded management guidance is for adjusted cash profit to be in the range £2.4m to £2.8m, rather than the small loss that analysts had anticipated. It gets better because a strong focus on debt collection and working capital management, combined with strong licence sales which account for about a third of total revenue, has led to a much better cash-flow performance. In fact, the company ended the financial year with net cash of £7m, or five times higher than analysts had forecast.
The trading update is significant for a number of reasons. Analysts Paul Hill and Hannah Crowe at research firm Equity Development rightly point out that Lombard's burgeoning cash pile removes "any lingering investors concerns that the business might need to raise fresh capital to fund its future growth plans", and add that the ramp up in second-half sales indicates "beyond doubt that the first-half performance was not a flash in the pan". I wholeheartedly agree and would flag up that the impressive cash performance was after capitalising £7.5m of research and development spend, and investing in a new state of the art centre in Birmingham.
Impact of operational gearing
The other obvious take from the trading update is that if the sales momentum can be maintained at these heady growth rates, then analysts' predictions of revenue rising to £40m in the current financial year are now looking far too conservative. That's worth noting because the step change in revenue from £34m to £40m would see an underlying operating loss of £1.5m turn into a profit of £1.6m, thus highlighting the operational leverage in the business. Indeed, based on Equity Development's revenue target of £46.6m for the 12 months to the end of March 2019, operating profit is forecast to rocket to £5.6m.
So, with the company continuing to win a raft of contracts for its software that automates the tedious and expensive tasks of regulatory reporting for clients, and also optimises collateral management to reduce the costs, complexity and constraints of trading in financial markets, I feel that the 18p target price I highlighted when I initiated coverage at 9p is now looking too conservative ('Banking on regulation', 13 Mar 2017). Indeed, net of cash on the balance sheet I feel the equity should be worth around 12 times what could prove to be conservative operating profit forecasts for the 2018-19 financial year, suggesting a target price of 20p is in order. Analysts at Equity Development are even more bullish, having just raised their
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