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Why This Tiny Lab Is Outpacing Global Giants · Investor Exchange

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At Investor Exchange, it's time for another podcast with your hosts, David and Brenda.
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Welcome to The Debate. Today, we're looking at LMS Compliance LTD, ticker LMS.SI.
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It's a small cap Singaporean firm at a pretty fascinating crossroads.
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You've got this traditional laboratory testing business trying to,
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well, transform itself into a high-tech ESG compliance platform.
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That is certainly the story they're selling. And I think the central question for us is,
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you know, is the market right to price this like a like a budding software company,
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a compliance as a service play or are investors just overpaying for a people
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heavy service business that's frankly seeing its margins get crushed?
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Well, I'm taking the buy side here.
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I see a genuine inflection point.
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The whole regulatory landscape in Southeast Asia is shifting,
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and it's shifting fast toward mandatory climate reporting.
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LMS is positioning itself to be the toll booth for all of that compliance.
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...is completely disconnected from the financial reality.
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You're paying a huge growth premium for a company that had what?
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Basically flat profit growth in the first half of fiscal 25?
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The story is exciting, sure, but the spreadsheet is worrying.
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Let's start with the momentum, though. I mean, for fiscal 24,
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they showed revenue up over 21% to almost 25 and a half million ringgit.
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They have a fortress balance sheet with nearly 10 million in net cash.
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But the real story, the one you can't ignore, is the pivot.
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They aren't just, you know, checking beakers in a lab anymore.
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With Singapore and Malaysia making climate reporting mandatory.
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LMS is rolling out digital tools.
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They're moving from one-off testing fees to what could become really sticky
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recurring revenue. I see the top-line growth. I do.
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But I also see what it costs them to get it.
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I mean, their profitability is, well, it's deteriorating.
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Their EBITDA margins, that's, you know, earnings before interest,
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taxes, depreciation, and amortization.
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Basically, their operating profitability, it just collapsed.
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It went from a really strong 45.8% all the way down to 36.
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Net profit margins are down to 20.5%. So you talk about a pivot,
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but right now that pivot just looks like a cost creep.
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You're paying almost 29 times earnings for 1.1% profit growth.
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That's a very expensive weighting game. The margin compression is real, I'll grant you that.
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But you have to view it as a necessary investment for the future.
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You just can't build a tech platform on a string budget.
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Okay, but is it a tech platform? I think this is my biggest problem with the whole bull case.
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We keep saying tech pivot, but look at the numbers. 93.6% of their revenue still
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comes from traditional laboratory testing.
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In the segment they actually call compliance assessment technology,
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it's less than 1% of revenue.
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This isn't software as a service, where you write code once and sell it a thousand
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times. This is still a business of hiring expensive people to do manual work.
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You're looking at a snapshot, not the movie. The compliance clock is the real catalyst here.
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Starting in fiscal 25, companies in Singapore must disclose scope 1 and 2 emissions.
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So LMS launched their Eisen GHG carbon accounting tool to automate this.
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This is the sticky revenue I was talking about.
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Once a company uses LMS for their carbon accounting, they're probably not going
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to switch. It creates a lock-in that their physical labs just never had.
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Software's great, yeah, but adoption takes time.
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And in the meantime, they're taking on some pretty big execution risks somewhere else.
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They just acquired 75% of Anchor technology in July to get into China.
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Which is a brilliant strategic move. They're diversifying away from being so
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reliant on the Malaysian market, and they're setting up a beachhead in China's
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absolutely massive food and beverage certification sector.
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The potential market there is, it's just exponential compared to what they have
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at home. Or it's diversification.
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I mean, China is a notoriously tough market for small foreign firms.
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The integration risks are huge. If they can't cross-sell their services effectively,
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they're just adding a ton of operational complexity and, well,
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probably diluting those precious margins we were just talking about even more.
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I disagree. The operating cash flow is healthy at 6.4 million ringgit,
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which more than covers their capital spending.
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They can afford this integration.
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And you have to remember the moat. You can't just spin up a competitor in this
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space like some generic software startup.
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You need regulatory accreditation. That creates a floor for the business.
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The target price of 44 Signapore cents implies something like a 26% upside.
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I think the market is waking up to that. A moat is only valuable if it protects profitability.
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Right now, at 17 times EV to EBITDA, the market is pricing in a victory that,
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well, it hasn't happened yet.
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Until they can prove they can monetize the software side and stop the margin
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bleed from hiring, I just see this as a no-growth testing peer trap.
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And ICE is a platform play that's perfectly positioned to capitalize on a mandatory regulatory shift.
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This kind of thing only comes around once in a generation.
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Well, we can agree on one thing. With that cash pile, they certainly have the runway to try.
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That they do. And that brings us to the end of today's debate.
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This content is intended to serve strictly and only as an informational,
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independent, objective summary of recent events and should in no way be interpreted,
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construed, or relied upon by any party as inside information or financial advice.