Lombard Risk Management Plc (LON:LRM) has raised £8m+ (gross) to invest in products for growth. The emphasis is on cementing LRM’s position in the huge fintech market of banking risk compliance and collateral monitoring for both regulatory and commercial banking purposes. In the past year, certain competitors have refocused emphasis to other fintech markets. LRM in contrast has invested, re-energised its top team and cemented a stronger and broader route to market. Just one example of this is the success selling LRM products with Oracle. LRM holds its AGM tomorrow.
► Strategy: Founded 27 years ago, LRM’s clients include over 30 of the global ‘Top 50’ financial institutions. In March it rebranded its enhanced AgileREPORTER® and finalised a Technology License Agreement with Oracle America Inc. This relates to regulatory reporting, a market growing after a pause last year. COLLINE®, its multi-asset collateral management is also expanding.
► Growth: Sales growth underperformed trend FY15 and FY16. Progress is now rapid. We upgrade the top line estimates again, to £30.0m and £37.5m for FY17E and FY18E respectively. In May, post results we had raised £28.5m and £33.5m. The June fund-raise prompts our latest move. Lombard Risk Management Plc makes significant software development and business infrastructure costs, so FY17E PBT is not the focus.
► Valuation: The business is set to achieve more than an 80% revenue increase in the three years to FY19E. Steady state, this is a 20%+ PBT margin business. On that basis, we see any valuation below c.2x sales for FY18E as anomalously low.
► Risks: The tie-in with Oracle is important to the top line progression and is in its first half year. The business is investing to enable that top line advance and so even pre capex, the group is only cash flow neutral FY17E. It is near free cash flow neutral in FY18E, although this is based on assumptions of high growth in income and in expenditure.
► Investment view: 2011-16 sales CAGR is 14.8%. We are confident the recent pause is to be followed by strong growth. FY13, FY14 PBT margins exceeded 20% and this type of business should achieve this once sales are commensurate with its market position. Under refreshed management and sales teams, an exciting proposition. Once the pick-up is seen, the rating will be patently too low.
