Lombard Risk Management Plc (LON:LRM) interims (22nd October) pave the way to a profitable full year FY16, ongoing sales growth. H1 sales growth was 16.1%. Nonetheless, we are trimming our FY16 sales estimates by £0.3m in order to be conservative. We also note the spending on sales, marketing and a likely rise in expensed technology spend for FY16. FY15 was a difficult year, with profit downgrades and the CEO departing in May. At the time we stated ‘medium term undimmed’. These interims confirm this, both financially and operationally, but ongoing investment for expansion means we re-instigate FY16 PBT estimates at conservative levels just below FY15.
► Strategy: This is a growth story. This requires software development, direct and indirect sales commitment globally and expansion to large referenceable clients and partners. Each of these factors support our repeat statements re: ‘medium term undimmed’.
► Growth: Bookings have grown 48% yoy. 5 year sales CAGR of 19% demonstrates the historic success. Whilst we estimate sales growth short term at 9% FY16 (5% FY15), over the coming years we consider the 19% rate to be repeatable. Total costs grew 20% last year and we estimate 15% FY16E (or 9% cash basis).
► Cost breakdown assessed: In the current year, we estimate 25% expensed technology spending growth. Amortisation/impairment rises 74% to £3.3m from £1.9m. This includes a £0.7m impairment as a result of a review of products’ respective growth potential. We expand on this trend, impacting FY16E PBT.
► Risks: Lombard Risk operates in a series of high growth global markets, selling to large customers with complex requirements. This has translated into consistent ongoing growth, the visibility of which is supported by evolving customer relationships and technology spend. Both require cash spending.
► Investment summary: FY16E may prove to be a second year of annual sales growth sub prior years’ high teens % rates. Sales generation is broadening and includes Alliances. This brings higher potential, with timing dependent on more complex inputs – thus supporting FY17. Pricing and pipeline remain strong.
