RM (RM.) has come a long way since it started supplying electrical parts to hobbyists in the early 1970s and the company could be about to take another major leap forward. Known as Research Machines, it soon began building computers for schools and this year expects to turn over almost £260m. But there's little money in some of its core activities these days and the company has decided to radically restructure its operations away from making PCs to supplying higher-margin software and services to the UK education sector. While this will shrink sales, it is expected earnings will turn around sharply following a 2014 trough, and forecast net cash worth almost half the company's market capitalisation easily underpins the investment case.
- Restructuring programme under way
- Drive towards higher-margin software products
- Forecast net cash worth half the business
- May return cash to shareholders
- Execution risk
- Year of rebuilding ahead
After much soul-searching, RM last month confirmed its decision to exit the sale of personal computing devices, part of the core education technology (ET) division. There was little prospect of finding a buyer for the struggling business and a protracted period of loss-making looked around the corner, so the move makes a lot of sense. Previous management had already sold loss-making operations and repaid debt, but the coalition government's winding down of Labour's Building Schools for the Future (BSF) programme meant RM had already pencilled in about £40m of lost revenue.
Overall, the new management team, led by chief executive David Brooks, expects changes at the group will halve ET revenue over the next two years. Last year, sales fell 13 per cent to £109m and underlying operating margin halved to 3.3 per cent. The division is unlikely to make a profit, either, given the lag between loss of revenue and cutting costs (300 staff will leave over the next 12 months). In 2015, however, broker Numis Securities believes margins at the new look ET business will bounce back to 6 per cent.
Pricing in the impact of RM's restructuring, Numis has cut EPS forecasts for 2014 by 40 per cent to 6.1p, but upgraded forecasts for the year to November 2015 by 12 per cent to 10.5p. It has cut forecasts for net cash, too - largely due to the £10m of anticipated restructuring costs - but still expects a stash of £46m at the 2014 year-end, worth 49p a share or 45 per cent of RM's market capitalisation. It also puts RM shares on a cash-adjusted forward PE ratio of 9.8 for 2014, dropping to just 5.7 the year after. So if things go to plan, there is significant value on offer here.
RM (RM.) | ||||
|---|---|---|---|---|
| ORD PRICE: | 109p | MARKET VALUE: | £102m | |
| TOUCH: | 109-113p | 12-MONTH HIGH: | 124p | LOW: 63p |
| FORWARD DIVIDEND YIELD: | 3.3% | FORWARD PE RATIO: | 10 | |
| NET ASSET VALUE: | 24p* | NET CASH: | £38.3m | |
*Includes intangible assets of £17m, or 18p a share | ||||
| Year to 30 Nov | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2011† | 351 | 10.3 | 7.30 | 3.00 |
| 2012 | 289 | 13.1 | 10.9 | 3.00 |
| 2013** | 259 | 15.4 | 12.8 | 3.36 |
| 2014** | 198 | 7.30 | 6.10 | 3.46 |
| 2015** | 173 | 12.4 | 10.5 | 3.57 |
| % change | -13 | +70 | +72 | +3 |
Normal market size:3,000 Matched bargain trading Beta:0.7 **Numis Securities estimates, adjusted PBT and EPS figures †14 months | ||||
In the meantime, RM, which two years ago appointed former Minister for Schools Lord Adonis to the board, will drive its other businesses hard. During the third quarter, the ET division signed a new seven-year IT managed services contract with South Lanarkshire council, and is a preferred bidder in Scotland to provide RM Unify, its cloud-based platform for apps and other content, for another two years. RM's e-books platform has been well received, too. According to industry research, secondary schools spend an average of £25,000 a year on books and primary schools £5,000. That implies spending of about £166m this year for the English state-funded sector alone. RM will receive more of that as the inevitable transition to digital from printed literature in schools gathers speed.
Elsewhere, tighter school budgets are a problem for the smaller supplies business - education resources - but demand for so-called e-marking services is growing profits at the assessment and data services division. A contract to provide the National Pupil Database for England has been extended to December 2014, too.
