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Why software firm Linedata's improving margins make its shares pretty attractive

Publication Date: 15 Oct 2018 - By Samuel Smith By Samuel Smith
Actionable
Differentiated

Equity Fundamental Equity EU ex-UK UK Technology

Linedata (EPA: LIN) is a compelling software sector growth story that has recently stalled, causing its share price to fall precipitously (~40%) from its all-time highs set back in 2017. However, by evolving its strategy, the company is positioned to reignite growth by better supporting the changing focus within the asset management industry. 

Management has embraced the industry shift away from helping clients navigate new regulation towards cost cutting, new client growth, data analytics and management, and cybersecurity risk management.

Furthermore, the firm is hoping to differentiate itself from the competition by improving capabilities in helping clients integrate and/or compete with the onset of robo-advisors, exchange traded funds, blockchain technology, and machine learning and artificial intelligence.

These moves should enable them to improve client growth and retention across their services and software businesses well into the future.

Another positive indicator for Linedata shares is that company insiders own 44% of the company. Such considerable skin in the game implies that management is bullish on the business’ prospects and will make decisions in the best interests of the shareholders moving forward.

Already in the first half of 2018, management’s strategic positioning has begun yielding results. Despite revenues dropping 7.5% year-over-year, they only actually fell 3.5% on a constant exchange rate basis.

Meanwhile, EBITDA, operating income, and net earnings grew year-over-year, with net income surging an enormous 61.3% due to the US tax cuts, internal cost improvements, and improved margins, particularly in the Lending and Leasing business. Furthermore, the balance sheet continued to see significant improvement, with net debt falling from €77.7m to €64.7m over the first six months of 2018. At under 1.5x EBITDA, that is a pretty conservative leverage ratio.

Considering that the price to earnings ratio is only 10.5, the improving order intake, highly diversified list of over 700 clients, and vastly improving margin and net income, shares appear very attractive right now.

Additionally, its physical presence in 20 major financial centers across the world in places such as Hong Kong and Mumbai in Asia, Paris and London in Europe, and New York, Chicago, and Seattle in the United States gives it up close and personal interaction with top-tier asset managers to enable them to attract and retain clients more effectively.

While its growth in profitability remains strong, the market clearly wants to see revenue growth return before rewarding Linedata shares with a higher multiple.

The key drivers will be (1) currency exchange rates steadying (which have significantly dragged on revenue performance in recent quarters); (2) effective client retention and organic growth (this has lagged as well in recent quarters); and (3) effectively marketing its new innovations to clients in the emerging strategic factors impacting asset managers and then seamlessly integrating their solutions to retain and grow their relationships with clients.

    

    

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Samuel Smith

 

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