FDM offers steady growth

FDM should continue to benefit from a robust global IT market, despite some potential headwinds. According to research house Gartner, despite the US/China trade war and Brexit angst, global IT expenditure is projected to rise by 1.1 per cent this year to $3.79 trillion (£3 trillion ), and a shift towards cloud-based offerings means expansion in the enterprise software arena is expected to be 7.1 per cent to $427bn. Supported by increasingly diversified revenues, robust margins and a hearty cash pile, FDM looks primed to take advantage.

A recent annual meeting update revealed that first-quarter trading was in line with management’s expectations. Mountie revenues – which now account for almost all of the top line – climbed by 18 per cent, with Mounties on client sites up by 538 to 3,848.

This followed on from an encouraging set of preliminary results for 2018. While the top line edged up by just 5 per cent, this reflected a planned reduction in revenues from lower-margin contractor staff. In turn, Mountie revenues climbed by 15 per cent to £239m, and the gross margin rose from 44.6 per cent to 48.6 per cent.  

FDM is also broadening its horizons by geography and sector. To the former point, the UK and Ireland is its largest market. It accounted for more than half of last year's sales and grew 18 per cent. But the group has been beefing up its presence overseas. Mounties “on site” in North America were up by nearly a quarter. Meanwhile, although financial services has historically dominated its client base, the group is expanding into other industries, including energy and resources. In the UK and Ireland alone 85 per cent of the 47 new customers won were non-financial.

True, training requires money. Spending on North America growth caused adjusted operating profits there to decline by 11 per cent to £13.6m, as FDM doubled the capacity of its Toronto training academy and set up shop in Austin and Charlotte. In the Asia Pacific region, adjusted operating losses widened from £0.3m to £0.4m following spending to more than double Australian headcount and to open a new academy in Sydney.

While Brexit and the trade war are the most noteworthy risks to FDM's growth strategy, the company also endured media speculation last summer about the potential for legal action in the UK around drop-out charges for training programmes. However, this appears to have faded. In fact, the group received more than 84,000 online applications last year, up from over 81,000. It prides itself on hiring graduates, ex-forces and returners-to-work.

FDM’s shares offer attractive income and the company has a progressive dividend policy. This is supported by minimal capital requirements (space is leased and most spending is expensed) and the net cash position. That said, dividend cover is slim at just 1.1 times last year, which means the dividend could quickly feel the strain if trading were to deteriorate. Cash conversion is generally impressive, but dipped last year as the group offered more clients better payment terms. This led to a rise in receivables (amounts owing to the company) to sales from 13 per cent to 15 per cent. This level of receivables to sales is far from concerning in itself, but the trend is something to keep an eye on.