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AIM listed Compliance software group Lombard Risk Management (LSE:LRM) has been a disappointing tip for me but could this be the year when it comes good? I think it might well be. I first tipped the shares back in January 2005 at 9.625p. Today they are 9.25p, valuing it at £23 million. But I can see good reason why they could at least double. And here is why.
The company has a track record of missing targets. That has not helped its love-in with investors. And it has, in the past, carried too much debt. Again that has not helped. But over the summer it bit the bullet and raised £1.5 million at 7.5p (June 6th) and followed it up with news of some decent contract wins. The ever tighter reporting requirements for banks (Lombard’s customers), driven by the Euro crisis, are helping the sales pipeline. This year’s revenues will demonstrate this clearly with a clear second half bias thanks to new COREP rules for European banks coming in 2013.
The company’s client base is well spread with more than 300 institutional clients including 30 of the 50 biggest banks in the world. This gives a relative visibility of recurring revenues (43% last year, it will be more this time around).
Following that placing I estimate that net debt is £1 million. For a company that last year reported a pre-tax profit of £2.5 million on sales of £12.7 million (and that will be higher this year as it enjoys a full contribution from Reg-Reporter, a US business bought in December 2011.
The company has been led by CEO John Wisbey (who is friend of mine to whom I recent sold a shed load of RSH shares, I should declare) since its inception and Wisbey remains the largest shareholder – he clearly wants a trade sale one day and thus his interests are aligned with those of other shareholders.
The forecasts below come from broker Charles Stanley
| Key financial data (£m) – IFRS | |||||
| Year to March | 2011A | 2012A | 2013E | 2014E | 2015E |
| Sales | 11.8 | 12.8 | 17.4 | 20.4 | 23.4 |
| PBT normalised | 0.6 | 2.5 | 4.6 | 5.8 | 7.5 |
| EPS normalised | 0.62 | 1.16 | 1.74 | 2.02 | 2.54 |
| DPS paid | 0.00 | 0.05 | 0.08 | 0.11 | 0.12 |
| PER (x) | 14.9 | 7.9 | 5.3 | 4.6 | 3.6 |
Wisbey always insists that tech stocks with a good recurring revenue stream get taken out and thus ultimately valued on revenue multiple bases. On that basis he would no doubt argue that a fair valuation is perhaps three times revenues (£60 million based on next year’s numbers equates to 26p per share). I am sorry to disagree with my friend but I never understand the logic of why a stock should be valued on a sales multiple in one sector and on a DCF basis everywhere else. Maybe it is because so many tech stocks have been bought at a loss-making stage in past, crazy, days? I do not know.
My valuation is based on earnings. In 2013 Lombard looks set to come good with record profits. But we are heading towards 2014 and valuing the company on a multiple of 2014 earnings I would argue that since this company is clearly capable of delivering double digit earnings growth on a sustainable basis, has a strong balance sheet and good revenue visibility it merits a decent rating. Having said that, it will take time to forgive past earnings misses. And so I’d say that, for now, 10 times next year’s earnings (20.2p) is a fair valuation. If Lombard can hit forecasts two or three times in a row the potential for a material re-rating is very real. But for now a forward PE of 10 is probably fair. For what it is worth Charles Stanley analyst Peter McNally has a 16p target. Either way, at 9.25p, I’d be a buyer.
lol. You couldn’t make it up.
It is interesting to know how many tips come from abroad. I mean foreign whistleblowers.