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 bullish stance. Buy.
Stadium on track for bumper growth
Investors have reacted positively to the first-quarter trading update from Stadium (SDM:134p), a niche electronics company specialising in wireless, power and human machine interface products, so much so that the shares have rallied strongly since I last advised buying at 107p and have hit my 130p target ('Five value opportunities', 15 March 2017). News of the appointment of a new finance director with excellent industry experience, latterly as finance and IT director at a division of FTSE 250 engineering group IMI (IMI:1,238p), has been well received, too.
The re-rating is justified as the closing order book has risen from £25.8m to more than £28m since the start of the year, driven by growth in higher-margin technology products, including high-growth wireless devices such as insurance telematics, and the fast-growing market for the internet of things, which encompasses security, smart home devices and energy management. As a result, Stadium looks well on course to deliver the 17 per cent hike in revenues to £62m predicted by analyst Jon Lienard at broking house N+1 Singer this year.
On this basis, expect pre-tax profits to increase by 23 per cent to £5.3m, EPS to rise from 8.7p to 10.7p and the dividend to be raised from 2.9p to 3.1p. This means that the shares are rated on 12.5 times forward earnings, falling to 10.5 times 2018 EPS expectations of 12.9p. If the current sales momentum can be maintained this not only de-risks EPS estimates, but also offers scope for multiple expansion as investors will be more inclined to value Stadium's earnings more highly.
So, having first advised buying the shares at 75p ('Switch on to the Stadium of light', 30 July 2014), since when the board has paid out total dividends of 7.7p a share, I would run profits.
Cello rings up gains
Aim-traded shares in pharmaceutical and consumer strategic marketing company Cello (CLL:137p) have passed through the 130p upper end of my target price range and are heading towards the last bull market highs around the 150p mark. I initiated coverage at 105p last autumn ('Marketing a breakout', 5 September 2016) and reiterated that advice at the full-year results ('Eight small-cap plays', 27 March 2017). For good measure, the company has also paid out total dividends of 3.4p a share.
In a trading update earlier this month, the company revealed that Defined Healthcare Research, a business delivering scientific strategic advisory services to a wide range of US, European and global biotech and healthcare clients, has performed strongly since its acquisition in early February. The directors also highlighted the rapid growth of the company's social media product, Pulsar, which is looking to gain critical mass following the opening of a larger and dedicated sales office in the US. The insight and market research industry has been disrupted by digital technology, centred on the growth of social media as a primary channel for gaining access to large, but highly targeted, samples at low cost and high speed. Cello's product precisely targets this new growth innovation in the industry.
True, Cello's shares now trade on 16 times current earnings forecasts, but with the board looking to deploy the cash raised in a £15m fundraising on earnings-accretive acquisitions, the forward PE ratio should drop sharply. Run profits.
Strong start to the year for Henry Boot
Shares in residential land developer and construction company Henry Boot (BOOT:300p) have hit my 300p target price after the company announced a strong start to the year at the tail end of last week, prompting analyst Nick Spoliar at brokerage WH Ireland to raise his full-year pre-tax profit and EPS estimates by 10 per cent to £45m and 25.9p, respectively. Investec Securities has similar upgrades.
Residential and sales have proved buoyant, with seven sites encompassing 900 plots sold for £16m since the start of January - double the level on the same period last year - contracts on a further two sites exchanged and discussions ongoing on the sale of another nine sites. The company is well on course to hit its full-year sales target of 2,000 plots, up from 1,609 in 2016. Moreover, even after netting off those sales, the land promotion portfolio continues to grow and now consists of 50 sites for sale and more than 17,600 plots, representing a 7 per cent increase. Jointly-owned housebuilder Stonebridge is trading well and is on target to ramp up sales from 70 to 100 units this year, while in York more than half the 163 flats built in the former Terry's Chocolate Factory have been sold and the remainder are expected to be sold this year. In the company's construction business, the level of contract opportunities coming to the market is similar to that in the past few years and the company is well on course to achieve its targeted 2017 activity.
In the circumstances, analysts have been raising their target prices: Investec's sum-of-the-parts valuation increased from 294p to 330p and WH Ireland's target price has been raised from 317p to 350p. I feel these valuations are not unrealistic, as the forward PE ratio would only rise to 13 and a prospective dividend yield of 2.4 per cent is healthy enough. So, having last recommended buying the shares at 245p ('Four undervalued growth plays', 24 April 2017) and having given the same advice at 211p at the time of a bullish pre-close trading update ('Exploiting undervalued special situations', 6 February 2017), I continue to rate them a buy.
STM's reassuring update
STM (STM:40p), a company specialising in the administration of assets for international clients in relation to retirement, estate and succession planning, and wealth structuring, has issued a reassuring trading update.
The vast majority of STM's earnings are derived from its qualifying recognised overseas pension schemes (QROPS) business, an offshore pension scheme approved by HMRC and used by expatriates and mobile employees whose tax domicile can change as a consequence of employment. As expected, the UK government's decision in the last Budget to introduce a 25 per cent tax on transfers into QROPS for residents located outside the EU has affected 80 per cent of all new business flows into STM's QROPS plans. But it has had no impact on the high-margin and annuity style recurring income generated from existing QROPS plans, which account for £8.5m of the £19.5m current-year revenue estimate of analyst Jeremy Grime at house broker FinnCap.
Importantly, STM has taken action to downsize its QROPS businesses in Malta and Gibraltar, thus negating some of the adverse impact on profitability for these operations, while at the same time Haywards Heath-based London & Colonial, an independent financial services group acquired by STM last autumn, has launched an international self-invested personal pension (Sipp) product. This has already delivered "a significant uplift in Sipp business for that operation", a point worth noting as Mr Grime has not factored any new international Sipp business, or any cost reductions, into his flat pre-tax profit estimate of £2.9m for 2017 and is "confident our numbers are conservative". I agree and see upside to FinnCap's diluted EPS estimate of 4p.
I would also flag up that, having raised the dividend per share by two-thirds to 1.5p in 2016, and with net funds of £8.6m on the balance sheet equating to 14.5p a share, a 20 per cent dividend hike to 1.8p a share this year, as FinnCap predicts, is well underpinned by the profits from STM's existing operations, which also include a life assurance wrapper product, insurance management contracts and a Jersey trust business.
Admittedly, STM's shares are only 14 per cent above the 35p level at which I initiated coverage ('Tapping into a pensions payday', 27 April 2015) and are slightly above the price when I last updated my view post the Budget ('Five value opportunities', 15 March 2017). However, underpinned by a prospective dividend yield of 4.6 per cent, and rated on six times earnings net of cash, the risk remains skewed to the upside. Buy.
MORE FROM SIMON THOMPSON...
A comprehensive list of all the investment columns I have written in 2017 is available here.
The archive of all the share recommendations I made in 2016 is available here
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