What to make of RM (LSE:RM.), a circa £50 million supplier of technology and resources to the education sector, after its stock has plunged to near a 30-year low?
While its financial risk is currently high, an incoming Labour government would likely mean expectations, at least, of higher education spending. After the stock dropped further this week – from 70p briefly below 60p – the chair and CEO bought shares, which I take as a cue for closer interest.
A debacle with varying promises along the way
RM listed at the end of 1994 as a rival to peer company Acorn Computers, selling computers to schools as part of a government drive. In four years its stock had quadrupled to 200p then soared near 1,000p in the tech-stock bubble, slumping right back after it burst.
Cuts in UK education budgets in 2011 meant a restructuring but by end-2019 the stock was near 300p.
The stock fell consistently from 240p exactly two years ago, despite interim results to 31 May showing improved performance, and despite UK schools being closed for eight weeks and exams cancelled. The CEO at that time spoke of “building a path to sustainable growth”.
Despite a 45% fall in net profit for the year to 30 November 2021, the dividend rose to 4.7p (see table) and with its strategy refreshed the chair asserted “a firm base to move forward”.
RM financial summary
Year-end 30 Nov
|Turnover (£ million)||186||221||224||189||206||214|
|Operating margin (%)||8.7||10.2||10.8||6.1||1.7||-10.1|
|Operating profit (£m)||16.2||22.6||24.2||11.5||3.6||-21.6|
|Net profit (£m)||12.9||16.9||19.1||8.4||4.2||-14.5|
|Reported earnings/share (p)||15.7||20.6||23.0||10.1||2.6||-19.3|
|Normalised earnings/share (p)||23.1||26.0||26.1||10.1||14.3||16.1|
|Operating cashflow/share (p)||14.3||20.0||14.1||25.3||5.5||-25.0|
|Capital expenditure/share (p)||1.6||1.4||7.3||10.1||18.7||6.3|
|Free cashflow/share (p)||12.7||18.6||6.8||15.1||-13.3||-31.2|
|Covered by earnings (x)||2.4||2.7||11.5||3.4||0.6||0.0|
|Return on capital (%)||22.9||31.8||25.8||10.7||2.5||-25.7|
|Net Debt (£m)||13.4||5.8||15.0||23.5||39.2||66.0|
|Net assets per share (p)||36.6||67.2||72.2||67.0||104||72.3|
Source: historic company REFS and company accounts.
The November 2022 year was then hit by challenges with IT implementation on the “Consortium” side of the group, which supplies a range of items from furniture and cleaning to exercise books, but which only represents a mid-teens’ percentage of revenue.
A new CEO, from January this year, asserted at prelim results last March: “I am pleased to report that we now have a much more stable financial and operational position, including a renewed banking facility to July 2025.”
Yet last Wednesday’s interims showed a £4.5 million adjusted operating profit last year becoming an equivalent loss, on revenue down 11%. Problems with the Consortium business have dragged on, “which cloud the good progress made across the rest of the group”.
Roughly break-even is anticipated for the full year, with a sweetener of £10 million identified cost savings to benefit the November 2024 year.
Going concern warning, down the financial review
The directors’ cash flow projection for the next 12 months implies a breach of the EBITDA covenant from RM’s third quarter (ending this month). Unless effectively tackled, there is also a risk of breaching a liquidity covenant in the November 2024 financial year.
Net debt is up from £42 million to £52 million in context of £61 million net assets, 120% of which constitute goodwill/intangibles. At least this increase in debt is accompanied re-scheduling from wholly short term to long term, although with higher interest rates recently it has meant a £2.2 million interim net finance charge additional to the £4.5 million operating loss.
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The recent sale of RM’s smaller Integris and Finance operations raised over £17 million, showing how intangibles can indeed have cash value.
Management says that it has shared financial data with the banks “who remain supportive and respectful of cost-saving and restructuring steps taken”. It is expected to agree suitable waivers and amendments, such as maturity extension, to retain the banking facility. Mind, until the banks agree, there has to be a doubt over RM as a going concern.
Artemis dumps its 7% stake yet two directors buy modestly
The drop below 60p was possibly accentuated by a temporary stock overhang: after yesterday’s close it was reported that on Wednesday’s results day, Artemis Investment Management sold its entire 7.3% stake.
Obviously, there would have been one or several buyers on the other side of this trade, and institutions are not unknown to capitulate at a stock nadir.
Yet on 20 July it was disclosed that Schroders had sold down its stake from 17% to 14%, which is notable given that this institution tends to be a long-term supportive investor, using stock price declines to add rather than reduce. This latest action has also proven prescient and could have been the most equity able [to be] sold at the time.
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Also on Wednesday, however, the CEO bought £5,000 worth of shares near 50p, which seems a bit “token purchase”, although the non-executive chair since February 2022 splashed out over £26,000 at 52p a share – a bit more meaningful.
Logic suggests the directors are right, given it is in the banks’ interests to remain supportive; although covenant waivers/amendments tend to involve cost, and management has yet to prove it can turn the Consortium business around in a context where they also cite dealing with schools becoming more challenging.
The chief risk – why Artemis has fled – would be a dilutive equity issue at some point, insisted by the banks.
Medium-term pension fund contributions add financial strain
Mind a misnomer by way of a £19 million (down from £40 million year-on-year) defined benefit pension scheme “surplus”. Note 14 to the accounts reveals that under accounting standards, one of three schemes – “CARE” - is in actuarial deficit. Moreover, CARE requires £1.2 million annual payments to December 2026, and the RM 1988 scheme requires £3.2 million a year to December 2024. While not large payments significantly extending, they are an unhelpful additional stress.
This, however, may be recognised in consensus forecasts, probably from the company broker, in which case guidance from RM itself. A near £3 million net loss in the current year to 30 November, turning around for a £3.3 million profit in 2024 and earnings per share (EPS) of 3.8p – implying a forward price/earnings (PE) of 16 times.
While that can seem plenty high enough versus a going concern qualification, if the banking challenges are managed through and EPS can be restored to a 10p region (versus 15p to 20p that pertained from 2017 to 2019) then the PE multiple drops to mid-single-figures.
If a share issue becomes necessary, obviously such conjecture would need revising down.
A guessing game as to which way the situation tilts
The messaging is somewhat mixed: “heavy-lifting stabilisation work is nearing completion” and yet “we have made a good early start, actioning opportunities, but it will take time for them to be reflected in our financial performance”.
A new chief financial officer from the end of August is a positive, given that he should have satisfied himself that RM merits joining and will be a “new broom”. He is also likely aware, if the story does take a further turn for the worse, that he would hardly be seen as culpable.
Since June, the Assessment and Technology divisions have continued to trade well: two key contract extensions alongside 100% customer renewals in RM Assessment; and Technology expecting to see revenue growth in the second half-year, as a result of turnaround actions, “with small single-digit growth for the full year”.
Yet “operational issues within Consortium have continued to be a drag...we expect Consortium trading to continue below expectations...hence affecting group full-year adjusted operating profit”. It is therefore quite a gamble whether this millstone can be lifted.
The potential reward for speculators currently is re-building margins towards 10%, like in the 2018 and 2019 financial years, when return on capital was over 30% and the dividend tested 8p a share.
On an investment view, steer well clear. But there is a case at least to watch the situation more closely given education spending should be relatively immune from recession. At 62p, a case exists for a high-risk, high-reward starter position. Buy.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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