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FDM fit for the future

The training and recruitment group operates within a huge and growing market
December 5, 2019

FDM (FDM) is a people business. It hires graduates, ex-Forces personnel and returners-to-work – all referred to as ‘Mounties’ – and trains them up as consultants in specialist areas of information technology (IT), before deploying them to client organisations. These clients are then able to permanently employ their designated Mounties, after the latter have completed their two-year ‘bonds’ – or training contracts.

IC TIP: Buy at 972p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points

Consistent revenue and earnings growth

Improving diversification

Attractive dividend yield

Promising market opportunity

Bear points

Vulnerability to macroeconomic conditions

Rising receivables to sales

Such a model is reliant on customer demand. This issue came to the fore within FDM’s half-year results to June 2019, when it reported that the second quarter had seen reduced interest from some UK government clients, pending Brexit and leadership clarity, and that there had been lower activity levels from a few financial services clients in North America. The group’s shares endured a considerable decline over the late summer and early autumn, with negative sentiment exacerbated by disappointing trading updates from the likes of listed recruiter Page Group (PAGE), and the news that HSBC (HSBA.) – an FDM client – was laying off thousands of staff.

However, we feel the reaction was overdone. While FDM may be vulnerable in the short term to an unpredictable backdrop, it boasts a plethora of plus points which could make it stronger in the long run. The shares have climbed by almost half since their nadir of 645p in October.

FDM has delivered consistent – and entirely organic – revenue and earnings growth. It has also worked to diversify sales, both by sector and geography, sits on a decent cash pile, and offers a healthy dividend payout. And broker Panmure reckons there will be “no effect” from HSBC’s aforementioned job cuts. Moreover, its market opportunity looks set to improve, with research house Gartner predicting that global IT spending will rise by 3.7 per cent to $3.9 trillion in 2020.

For the first six months of the year, FDM’s revenues climbed by 14 per cent to £134m. This was fuelled by a 16 per cent rise in Mountie revenue to £133m, in tandem with a planned 44 per cent reduction in ancillary contractor revenue to £1.8m.

In terms of diversification, the group won 40 new clients, more than two-thirds of which were non-financial, helping FDM to reduce its historical concentration in this area. In the UK and Ireland – FDM’s largest region, constituting around half of Mountie revenues – the group has achieved an increasing presence in energy and resources. Meanwhile, despite the cited challenges in North America (FDM’s second-largest region), activity levels here at the time that the half-year numbers were published were “encouraging”.

While the group has permanent training centres, it also runs pop-up facilities, indicating that it can be flexible to match client requirements. Such investment contributed to a slight drop in the adjusted operating margin (before performance share plan expenses) from 21.4 per cent to 20.1 per cent.

On the balance sheet, receivables as at June recorded a noteworthy rise, but were partly inflated by higher accrued income tied to two weeks of timesheets, for which invoicing occurred in July. This should reverse out, though.

FDM (Holdings) (FDM)   
ORD PRICE:972pMARKET VALUE:£1.1bn 
TOUCH:971-973p12-MONTH HIGH:1,014pLOW:645p
FORWARD DIVIDEND YIELD:4.1%FORWARD PE RATIO:24 
NET ASSET VALUE:65.0p*NET CASH:£28.7m* 
Year to 31 DecTurnover (£m)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
201618937.525.619.6
201723447.231.826.0
201824551.235.830.0
2019**27354.638.134.5
2020**30358.841.039.5
% change+11+8+8+14
NMS:1,500    
BETA:0.83    
*Includes intangibles of £20m or 18.2p per share
**Panmure Gordon forecasts, adjusted PTP and EPS figures