RM buckles under cost pressures

On the face of it, conditions are favourable for educational resource provider RM (RM.). Schools and nurseries are open, examinations are back, and – recession or no recession – children will always need learning materials.  

The group, however, has had a difficult six months, with none of its three divisions achieving profit growth. RM Resources – which supplies physical resources to schools and nurseries – increased sales by 7 per cent, but struggled with high freight costs and shipment delays. As a result, adjusted operating profit more than halved to a meagre £1.2mn, from revenue of £51.6mn.

RM’s assessment arm – which provides online testing services – was similarly disappointing. While sales grew by 17 per cent, adjusted operating profit sank, due to “higher costs in the short term” associated with software development. An expensive, group-wide IT programme is also “proving more challenging than anticipated” and is weighing on margins.

The group’s main problem seems to be its technology arm, where revenue fell and adjusted operating profit dropped by 47 per cent. RM has appointed new leadership in the division in a bid to turn it around. However, it warned that the project “will take time and profit recovery will lag revenue growth”.

RM’s level of debt is also setting off alarm bells. Net debt has almost quadrupled year on year to £41.5mn due to the “challenging” IT project. As a result, dividends have been suspended and RM’s banking partners have increased their net debt / adjusted Ebitda ratio covenant from 2.5 times to 3 times for the May and November 2022 period end tests.

This, in turn, has warped RM’s balance sheet: the leverage extension means borrowings have been reclassified as current liabilities, and the group now has £43.8mn of debt that – in theory, at least – is due within a year. Management stressed that lenders “have made clear they currently have no intention of accelerating all or any part of the loan repayments” and borrowings are expected to revert to non-current liabilities at the end of November. 

What will happen if RM’s financial situation worsens, however, remains to be seen.

Analysts at Peel Hunt identified “some green shoots”, including strong international growth in RM Resources, and noted that the dividend policy will be reviewed ahead of the group’s preliminary results. Meanwhile, the shares dropped by 44 per cent following the results announcement, meaning the stock is cheap.

That’s not enough to tempt us, though. Sell. 

Last IC View: Hold, 165p, 15 Feb 2022