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FDM's 'Mounties' on track

The IT consultancy group looks set for steady growth, with new opportunities in the pipeline
April 5, 2018

Research house Gartner expects global spending on information technology to reach a staggering £2.6 trillion in 2018, up 4.5 per cent from 2017. This is excellent news for FDM (FDM), the professional services company specialising in IT. FDM recruits graduates, ex-forces employees and people returning to work, training them up in specific areas – for example, cyber-security or data analysis – before stationing these so-called ‘Mounties’ as consultants within client organisations. This model has proven successful over the four years since the company's shares were relisted on London’s main market, with revenues compounding at  22 per cent growth a year since then. 

1006p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points

Strong sales growth translating into earnings momentum
Continuing diversification of client base
Expanding capacity in North America
Decent dividend yield

Bear points

Potential disruption of Brexit to UK operations
Weaker profits in Europe and the Middle East

FDM’s sales have been buoyed by sectoral and geographical diversification. In turn, this momentum has endured further down the group’s income statement. For 2017, pre-tax profits climbed by 24 per cent – the same proportion as the top line. Over the 12 months, Mountie revenue rose 24 per cent to £207m – comprising 89 per cent of overall group sales. The remainder stemmed from contractors brought in to manage specific clients' needs, but this is declining as FDM focuses on boosting higher-margin Mountie numbers. This plan appears to be paying off: Mounties assigned to client sites were up 17 per cent at 3,170, while 72 new clients were signed up, compared with 49 in 2017.

The UK and Ireland constituted the lion’s share of total Mountie revenue last year, at 51 per cent, but this marked a slight decline from 2016 as FDM continued developing its international operations. Such a global approach is particularly important amid ongoing uncertainty in the UK linked to Brexit. That said, broker Panmure Gordon notes that although EU talent does contribute to the supply of FDM's Mounties, three-quarters of the overseas students in the UK are from outside the EU anyway.

FDM has diversified by region even within the UK. While total UK Mountie sales grew by 13.6 per cent to £107m, more than half of the country’s Mountie placements derived from outside of London, and a temporary training centre was opened in Birmingham to meet and attract client demand. Government clients remained a key focus, with 315 Mounties placed in the public sector, up from 206 in 2016. That’s not to say work was heavily concentrated in specific areas. In fact, more than three-quarters of 43 new UK clients came from sectors beyond financial services and banking, reflecting a broadening of the customer base. And while the number of Mounties completing training fell from 1,068 to 839, this simply mirrored the phasing of courses.

Overseas, North American Mountie revenue grew 36 per cent to £73.8m, but training capacity climbed just 4 per cent in 2017. In response, FDM is opening six new classrooms in Toronto, bringing greater capacity and thus the potential for new sales opportunities. Analysts at broker Investec say that a pop-up training facility in Texas is also being planned. They think this might ultimately repeat the success of Toronto’s 400-plus Mountie placements.

The Europe, Middle East and Africa division hasn’t had quite the same level of sales acceleration as other markets – rising 9 per cent to £13.1m lat year. Pre-tax profits here were also weaker, falling 37 per cent to £0.76m. However, this resulted from investment in employees and facilities. Indeed, such spending supported a 140 per cent uplift in training capacity at Germany’s Frankfurt academy, which should drive continued growth across the country. True, some Swiss clients have reduced their Mountie headcount. But FDM recently opened in Austria, providing another segment to develop.

Meanwhile, Asia-Pacific Mountie revenues climbed by 90 per cent to £13.7m, albeit from a low base of £7.2m. The region saw a break-even operating performance in the second half of 2017, and its first locally-trained Mounties were deployed with customers in Australia – representing yet another potential growth platform.

FDM (FDM)    
ORD PRICE:1,024pMARKET VALUE:£1.1bn
TOUCH:1,016-1,024p12-MONTH HIGH:1,039pLOW: 713p
FORWARD DIVIDEND YIELD:3.4%FORWARD PE RATIO:29
NET ASSET VALUE:60pNET CASH:£36.8m
Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201516129.420.521.5
201618935.324.219.6
201723443.729.426.0
2018*24146.532.430.0
2019*26850.134.934.5
% change+11+8+8+15
Normal market size:500   
Matched bargain trading    
Beta:0.3   

*Investec forecasts